AARP INCOME TRUST, N-30D, 1995-11-29

AARP INCOME TRUST
N-30D, 1995-11-29

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ANNUAL REPORT
TO SHAREHOLDERS

AARP Investment Program
from SCUDDER

SEPTEMBER 30, 1995

LETTER TO
SHAREHOLDERS

UNDERSTANDING
THE VOLATILITY
OF YOUR
MUTUAL FUNDS

AARP FUND
REPORTS

INVESTMENT
PORTFOLIOS AND
FINANCIAL
STATEMENTS
<PAGE>

Table of Contents

Letter to Shareholders ........................................... 2
Special Section:
Understanding the Volatility of
Your Mutual Funds ........................................... 7
AARP Fund Reports ........................................... 12
AARP High Quality
Money Fund ........................................... 13
AARP High Quality
Tax Free Money Fund ........................................... 15
AARP GNMA and
U.S. Treasury Fund ........................................... 17
AARP High Quality
Bond Fund ........................................... 19
AARP Insured Tax Free
General Bond Fund ........................................... 21
AARP Balanced Stock
and Bond Fund ........................................... 23
AARP Growth and
Income Fund ........................................... 26
AARP Capital
Growth Fund ........................................... 29
AARP Funds'
Investment Portfolios ........................................... 34
Financial Statements ........................................... 76
Financial Highlights ........................................... 82
Notes to Financial
Statements ........................................... 86
Report of Independent
Accountants ........................................... 91
Officers and Trustees ........................................... 93
Service and Tax Information ........................................... 96

<PAGE>

Letter to Shareholders

Dear Shareholders,

Over the period covered by this Annual Report--October 1, 1994 through September
30, 1995--the benefit of staying committed to your investments became evident.
The fiscal period began in late 1994, one of the worst years in history for the
bond market and a challenging year for the stock market. Those of you who
maintained a long-term investment perspective and remained patient should be
pleased. The stock and bond markets have performed exceptionally well since the
beginning of 1995. In this environment, the AARP income and growth-oriented
Funds provided solid returns while continuing to follow their conservative
investment strategies. Descriptions elaborating on the performance of the AARP
Funds begin on page 12.

We would first like to spend a few paragraphs discussing the stock and bond
markets and then review some matters specific to the AARP Investment Program. We
have also added a Special Section to the Report this year that provides you with
some tools with which to evaluate your mutual fund investments--specifically how
to assess the risk of share price volatility. The section begins on page 7 with
a brief discussion of mutual fund risk, followed by questions that you might ask
a mutual fund company when considering a particular fund. A detailed grid then
provides the answers to those questions as they relate to the AARP Funds. We
hope this will allow you to compare the AARP Funds to one another and to other
funds you may want to consider for your investment portfolio.

The Stock and Bond Markets

As economic growth slowed in the beginning of 1995, concerns about inflation
abated and expectations that the Federal Reserve Board (the Fed) would lower
interest rates heightened. As a result, short- and long-term interest rates
began to decline. On July 6, 1995, the Fed cut the Federal Funds rate (the rate
banks charge each other for overnight loans) by .25% to 5.75%. In making this
cut, the first in nearly three years, the Fed cited waning inflationary
pressures, with inflation hovering at less than 3%. The economy overall showed
strong corporate profits, low inflation, and declining interest rates.

This good news for the stock market propelled it to new heights. The unmanaged
Dow Jones Industrial Average--the price-weighted average of 30 actively traded
blue chip stocks--hit one record after another, ending September 1995 at 4789, a

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<PAGE>

number that only a few years ago would have seemed impossible. The unmanaged
Standard and Poor's 500 Stock Price Index returned 29.75% from October 1, 1994
to September 30, 1995.

The bond market also posted significant gains in this environment because as
interest rates decline, bond prices rise. Long-term interest rates, as measured
by the 30-year U.S. Treasury bond, declined from 7.81% on September 30, 1994 to
6.57% on September 30, 1995. Short-term interest rates, as measured by the
three-month Treasury bill, declined to 5.40% on September 30, 1995 from a high
of 5.93% in February of this year.

Looking Ahead

Our outlook for the bond market remains positive due to our expectations that
inflation should remain stable for the next year or so, and that interest rates
should also remain stable or slightly decline.

Our outlook for the stock market also remains positive. Stocks generally perform
well in an environment of low interest rates and low inflation. However, while
earnings growth continues, we may be nearing the end of the current business
cycle. (A business cycle is a pattern of fluctuating economic output and
growth.) Historically, the latter part of the cycle can be characterized as very
uncertain for stock investors. As the slowdown in economic activity becomes more
pronounced, corporate earnings and stock prices sometimes suffer. While this may
cause some short-term volatility, we continue to believe that stocks will
outperform bonds and cash equivalents over the longer term.

What This Means for Investors

We believe investors need to continue to focus on their long-term investment
goals rather than on short-term uncertainties in the markets. If you have an
investment time horizon of three years or more and can accept that both the bond
and stock markets will have volatility, short-term downturns in the market
should have no impact on your primary investment goal. In fact, these downturns
could provide investment opportunities. However, it is also important to put the
recent strong performance of the markets into perspective and not expect these
unusually high returns to continue indefinitely. Remember that diversification,
or allocating your assets in a mix of different investments such as stocks,
bonds, and money market investments, can be a sensible strategy to provide you
with a degree of protection from market volatility.

The AARP Investment Program from Scudder

As we have mentioned often over this past year, 1995 marks the 10th anniversary
of the AARP Investment Program. Over the past ten years we have learned more and
more about the needs of our shareholders. Recognizing these needs, all of the
AARP Mutual Funds are managed conservatively as the portfolio management teams

3
<PAGE>

try to moderate the share price volatility of your investment. This makes the
AARP Funds distinct from many other mutual funds which may seek long-term higher
returns, but do not focus on reducing short-term share price fluctuation. At the
same time, the AARP Funds will provide the opportunity for competitive returns.
Of course, while the AARP Funds are conservatively managed, it is important that
you realize that your principal is never insured or guaranteed, and the value of
your investment and your return will move up and down as market conditions
change.

It is this commitment to conservative investing that has continued to appeal to
AARP members. As of September 30, 1995, there were more than 670,000 investors
participating in the Program and nearly $12 billion in assets under management.
With each new shareholder comes different needs. That is why the Program prides
itself on the introduction of new services and features that will help you meet
those needs. In addition to those outlined on the back of this Report, we are
pleased to note the following services and enhancements.

Enhanced Easy-Access Line

Since its initial introduction in 1990, we have continued to improve the
Easy-Access Line as the needs of our shareholders have changed. Based upon the
most recent input from you, we have enhanced the service. Originally scheduled
for an October 5th implementation, the new service was instead made available on
October 26th. If you attempted to use the service but could not access it, we
encourage you to try again by calling toll-free 1-800-631-4636. It is now easier
to use and more informative than ever before.

For detailed information on the enhanced Easy-Access Line, please refer to the
October issue of Financial Focus, or call us toll-free at 1-800-253-2277.

New Funds Centers

We were happy to announce that AARP shareholders can now be assisted in
Scudder's Funds Centers in San Francisco and New York. As with Funds Centers in
Boston, Boca Raton, San Diego, and Scottsdale, you can obtain face-to-face
assistance from knowledgeable Mutual Fund Representatives who are specially
trained to understand the investment objectives of AARP members. So if you live
in these areas and need help in allocating your assets, have questions about
planning for retirement, or want to learn more about the AARP Mutual Funds, stop
in and see us. For directions, please call us at 1-800-253-2277.

4
<PAGE>

New Office in Norwell

We were pleased to open our new Shareholder Servicing Operations Center in
Norwell, Massachusetts in September. While our toll-free phone number has
remained the same, our AARP Mutual Funds Representatives will now receive
certified or registered mail at the following address:

AARP Investment Program from Scudder
42 Longwater Drive
Norwell, MA 02061-1612

Regular mail should continue to be sent to:

AARP Investment Program from Scudder
P.O. Box 2540
Boston, MA 02208-2540

In Closing

In addition to reading the Special Section about risk that follows, we encourage
you to read the individual Fund Reports. Since the AARP Investment Program has
now been in existence for ten years, you will see ten-year performance data for
most of the Funds included for the first time in our Annual Report. We encourage
you to give significant attention to these long-term returns because they
provide perspective on how each of the AARP Mutual Funds has performed through
different types of markets.

If you have questions about your Funds or the information provided in this
Report, please call our knowledgeable AARP Mutual Fund Representatives between
the hours of 8:00 A.M. to 8:00 P.M. Monday through Friday, eastern time at
1-800-253-2277.

Sincerely,

/s/Cuyler W. Findlay
Cuyler W. Findlay
Chairman

/s/Linda C. Coughlin
Linda C. Coughlin
President

/s/Douglas M. Loudon
Douglas M. Loudon
Investment Director

5
<PAGE>

BLANK PAGE

6
<PAGE>

Understanding the Volatility of Your Mutual Funds

As shareholders, many of you received the November 1995 issue of Financial
Focus, the Program's monthly newsletter. In it, we presented information about
how to assess some of the risks associated with your mutual funds. Because of
its importance, we have repeated much of the information in this Special
Section. In addition, we have provided you with statistics about the AARP Income
and AARP Growth Funds so you can begin to understand how to evaluate such
measurements as standard deviation and duration. We hope to continue to provide
you with similar information on a periodic basis. As you read through this
section, please remember that our AARP Mutual Fund representatives are able to
help you with many of your questions. Please call toll-free 1-800-253-2277.

Defining Risk

Currently, the Securities and Exchange Commission (SEC) is determining if it is
possible to define a universal method of measuring the risks of a particular
fund. Having risk benchmarks to accompany performance benchmarks would greatly
enhance an investor's ability to evaluate a mutual fund. Until then, however,
determining a fund's risk requires some homework. But what do we mean by risk?
Risk, as you know, is a multifaceted concept that means different things to
different people. What may seem risky to you may be conservative to someone
else. That is, in fact, why it is so difficult to create a risk benchmark that
is appropriate for every type of mutual fund.

We can define risk broadly as the possibility that you will lose part of your
investment. At one end of the risk spectrum are money funds, which pose little
risk to your principal (though they do pose risk to your purchasing power if
your investment does not increase in value to ward off inflation and taxes). At
the other end are growth funds, which are characterized as having a high degree
of risk because their value can decline notably over the short term. Related to
this is the fundamental relationship between risk and return. Generally, if you
choose a less risky investment, you must expect a lower return. Conversely, if
you expect potentially higher returns, there is usually more short-term risk
involved.

What is Your Tolerance for Risk?

Ultimately, evaluating the risk of an investment involves understanding your own
tolerance for risk as well as your investment time horizon. If you have a short
investment time horizon, you would be concerned about whether the income you
receive will keep up with taxes and inflation. If you have a long investment

7
<PAGE>

time horizon, you need to think about how far down an investment value could
go--and how long it could stay down--before you start feeling very
uncomfortable.

While you think about this, remember that no real loss or gain is realized until
you sell your investment. That is why time is such an important factor. A way
for you to help manage risk is to commit for the long term and understand the
importance of diversifying your investments among several types of mutual funds
and dollar cost averaging, or investing a fixed amount of money at regular
intervals.

Managing the Risk of Share Price Volatility

Because there are so many types of investment risk, and because there are no
universal methods of measurement, it may be helpful to focus on a risk over
which portfolio managers of a mutual fund can exert some control--share price
volatility. A year and a half ago we at the AARP Investment Program looked at
the question of volatility and started to better define our volatility
objectives and refine the investment strategies of three Funds: The AARP High
Quality Bond Fund, the AARP Insured Tax Free General Bond Fund, and the AARP
Capital Growth Fund. Today, all the Funds are managed to moderate the risk of
share price volatility, or the frequency and magnitude of declines in each
Fund's net asset value. The tradeoff will be returns that while competitive, may
not offer returns of similar funds that are not managed to reduce share price
volatility.

The following questions may help you determine the potential volatility of a
mutual fund.

Is the Fund Managed to Moderate Volatility?

A stock fund is managed to moderate volatility if it has a more diversified
portfolio, which usually lowers the risk to the fund because the poor
performance of a few securities will be cushioned by the positive performance of
the majority. Therefore, a stock fund that is highly concentrated in one
particular sector poses more risk than one that is diversified among many
different sectors of the market. For a bond fund, moderating volatility relates
to the degree of interest rate exposure. (Please refer to the next page for the
section on duration.)

What is the Fund's Standard Deviation?

Standard deviation measures how much a fund's return fluctuates from month to
month. Funds with high standard deviations have generally performed more
erratically in the past. However, consistency can be misleading because a fund
that declines steadily month after month may have a low standard deviation.
Therefore, when you look at a fund's standard deviation, also look at its
performance to determine whether the returns the fund produced were acceptable
to you given its volatility. Be aware too that standard deviation does not
reflect market performance, nor does it predict future performance.

8
<PAGE>

As you look at the grid on pages 10 and 11, you will note that we have quoted
three-year standard deviations for the AARP Income and AARP Growth Funds, which
provide a more complete picture than one-year figures. We have also provided
three-year average annualized returns as well. As you review these figures,
please remember that the refined investment strategies of the AARP Funds
mentioned previously might decrease the Funds' standard deviations in the
future.

What is the Fund's Duration?

Duration indicates a bond fund's sensitivity to changes in interest rates. It
measures how a bond fund may react to a one percentage point change in interest
rates. For example, if a bond fund has a duration of four years, it should lose
about 4% of its value if interest rates rise by one percentage point and gain
approximately 4% if rates decline by one percentage point. Since duration
changes as interest rates change, you should check your fund's duration
periodically, remembering that the lower the duration the less volatility the
fund endures. Duration is a more accurate measure of interest rate risk than
average maturity because it takes into account interest payments as well as
amount paid at maturity.

Does the Fund Use Derivatives?

Derivatives are securities whose value is derived from or based on an underlying
security, asset, or index. They are subject to the same fundamental relationship
between risk and potential return as are all investments. The higher the risk of
a derivative, the greater its potential return. When used by a mutual fund,
derivatives can reduce or increase risk in the same way that any security in the
portfolio can. Derivatives are often used to help manage risk and to protect
against the potential of large losses, or to increase your potential returns.
Investment professionals can use one of a variety of techniques to hedge (that
is, to offset investment risk) utilizing such derivatives as options, futures,
and forwards. If a fund uses derivatives, find out if they are used for
defensive purposes (which may not add significant risk to a portfolio, and may
in fact reduce risk), or to increase return (which often adds significantly
greater risk to the fund).

Assessing the Volatility of the AARP Mutual Funds

The following grid summarizes how the AARP Mutual Funds (with the exception of
the AARP money funds) are managed to reduce share price volatility, and gives
standard deviation, duration, credit quality, and derivative information. Though
the grid does not compare the AARP Funds to other funds or benchmarks, it does
allow you to compare the AARP Funds to each other. If you would like to discuss
any of this information with our AARP Mutual Fund Representatives, please call
toll-free at 1-800-253-2277.

9
<PAGE>

<TABLE>
<CAPTION>
STANDARD
HOW THE FUND IS MANAGED DEVIATION
FUND TO MODERATE VOLATILITY (9/30/92-9/30/95)
---- ---------------------- -----------------
<S> <C> <C>
AARP INCOME FUNDS

AARP GNMA and The Fund actively seeks to reduce price volatility by investing in 3.06
U.S. Treasury Fund a combination of short-, intermediate-, and long-term securities,
and by adjusting the mix of GNMA and U.S. Treasury securities. It
generally keeps a significant portion of the portfolio in
short-term assets, which helps reduce share price fluctuation.

AARP High Quality Bond Fund* The Fund invests in securities with varying maturities. At least 4.87
65% of the assets of the Fund are invested in U.S. Government,
corporate, and other fixed income securities. The non-governmental
investments of the Fund will be spread among a variety of
companies and will not be concentrated in any one industry.

AARP Insured The Fund invests primarily in a mix of high-grade short-, 6.80
Tax Free General Bond Fund* intermediate-, and long-term municipal securities that are insured
against default by private insurers. We expect the standard
deviation to decline in the future.

AARP GROWTH FUNDS

AARP Balanced Stock The Fund invests in a broadly diversified mix of equity securities, 3-year figure not
and Bond Fund bonds, and cash reserves. The Fund invests only in dividend-paying available since
stocks, which tend to have less volatility than other types of Fund is less
stocks. than 3 years old.

AARP Growth and The Fund consists of a broadly diversified portfolio consisting 7.78
Income Fund primarily of dividend-paying stocks, which tend to have less
volatility than other types of stocks. It invests in common stocks
and securities convertible into common stocks, as well as
preferred stocks.

AARP Capital This Fund underwent the most dramatic strategy change. It now 11.34
Growth Fund* consists of a broadly diversified portfolio consisting primarily of
high-quality, medium- to large-sized companies with strong
competitive positions in their industries. It invests in common
stocks and securities convertible into common stocks, as well as
preferred stocks. We expect the standard deviation to decline in
the future.

* This Fund's investment strategy was modified in February 1995.
</TABLE>

10
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUALIZED EFFECTIVE DERIVATIVES
TOTAL RETURN DURATION IN PORTFOLIO
(9/30/92-9/30/95) (AS OF 9/30/95) CREDIT QUALITY OF BONDS (AS OF 9/30/95)
----------------- --------------- ----------------------- ---------------
<S> <C> <C> <C>
4.64% 2.80 All securities in the portfolio are No derivatives at this time.
backed by the full faith and credit of
the U.S. Government.

6.09% 4.70 100% of the Fund's securities are No derivatives at this time.
high-quality-- AAA-, AA-, or A-rated. At
least 65% of the Fund's assets must be in
securities that are AAA- or AA-rated, the
top two ratings.

6.37% 7.50 100% of the Fund's securities are Approximately 10% of net
high-quality-- AAA-, AA-, or A-rated. At assets were exposed to
least 65% of these securities are insured derivatives for defensive
against default. purposes.

Not applicable. 4.80 of bond portion All bonds are investment grade -- at least Approximately 3% of net
of portfolio. 75% of the Fund's bonds are AAA-, AA-, or assets were exposed to
A-rated. The remainder can be Baa derivatives primarily for
(Moody's) or BBB (Standard & Poor's) or defensive purposes.
higher.

15.79% Not applicable. Not applicable. No derivatives at this time.

13.58% Not applicable. Not applicable. No derivatives at this time.

</TABLE>

11
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AARP Fund Reports

The following pages contain a summary of each Fund in the AARP Investment
Program from Scudder. Each AARP Mutual Fund report contains the one-year total
return, five-year total return, and ten-year total return or Life of Fund total
return. Because a one-year total return could be high or low depending on market
conditions over a 12-month period, it is useful to have the perspective of the
five-year and ten-year total return figures. Within each Fund description
(except for the AARP money funds), one-year total return is broken down into two
components: distribution of income and capital change. Distribution of income is
defined as reinvested dividends. Capital change is defined as the change in the
price per share including any reinvested capital gains distributions.

You will also note that all of the AARP Funds, except the AARP money funds, have
been compared to market indices. We are providing these comparisons to comply
with the Securities and Exchange Commission's (SEC) disclosure requirements.
Under these requirements, all mutual funds (except money funds) are required to
compare their performance over the past ten years (or Life of Fund) to that of a
broad-based securities market index. It is important to note, however, that
these indices have limited relevance to the performance of mutual funds. They do
not reflect the deduction of any servicing, investment management, or
administration expenses.

Also, the AARP Mutual Funds are unique in the high quality of their investment
portfolios and the emphasis on seeking to reduce share price fluctuation. This,
in turn, can have significant impact on performance. Therefore, when comparing
an AARP Mutual Fund's performance with that of a major market index, remember
that any comparison may be of limited value.

12
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AARP High Quality Money Fund

At a Glance

Fund Overview

This Fund is designed to preserve your principal while you earn money market
returns. The AARP High Quality Money Fund has quality standards high enough to
have secured a AAAm rating from Standard & Poor's*, a leading national
independent rating firm. The Fund seeks to maintain a $1.00 share price,
although there may be circumstances under which this goal cannot be achieved. It
is important to note that unlike bank savings accounts, the Fund is not insured
or guaranteed by the U.S. Government and the yield of the Fund will fluctuate.

* The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.

For Whom the Fund is Designed

This Fund may be appropriate for investors who have short-term needs or who do
not want the risk of investing in stocks or bonds. These investors include those
seeking money market income to help meet regular day-to-day needs, those who
need immediate access to their assets through free checkwriting, those who want
to diversify their assets with an investment designed to provide a degree of
safety and stability, and those seeking a short-term investment prior to making
longer-term investment choices.

Q How has the Fund performed?

A As with all money funds, the performance of the AARP High Quality Money
Fund mirrored what happened to short-term interest rates. Short-term
interest rates, as measured by the three-month U.S. Treasury Bill, declined
over recent months. By September 30, 1995, short-term interest rates
declined to 5.40% from as high as 5.93% earlier this year. While this trend
has caused a gradual decline in the Fund's yield since February, the Fund's
7-day net annualized yield of 4.97% as of September 30, 1995 was still
higher than its 3.94% yield on September 30, 1994. The Fund has been able
to maintain a competitive yield by lengthening its average maturity (see
investment strategy on the next page).

The Fund's one-year total return was 4.99%, which was made up entirely of
income. The five-year cumulative total return was 21.95%; the five-year
average annualized total return was 4.05%; the 10-year cumulative total
return was 69.05%; and the 10-year average annualized total return was
5.39%. Of course past performance is not a guarantee of future results, and
yield will fluctuate.

13
<PAGE>

Q What has been the Fund's investment strategy?

A In the latter part of 1994 and into the first several months of 1995, we
maintained a short average maturity to take advantage of rising interest
rates. The Fund's average maturity was as short as 21 days back in February
when short-term interest rates peaked at 5.93%. As short-term interest
rates began to decline, the portfolio management team purchased securities
with longer maturities. By gradually lengthening the average maturity of
the Fund to approximately 55 days as of September 30, 1995, we were able to
provide shareholders with a higher yield.

We also decreased our investment in floating rate notes from 57% to 34%
over this period. Floating rate instruments "float" with the market as
interest rates rise or fall. Therefore, in a declining interest rate
environment, we decreased our exposure to such securities.

Q What can I expect from the Fund in the upcoming year?

A The Fund should remain a good alternative for your short-term assets or if
you are seeking stability of principal. However, we expect short-term
interest rates to remain relatively stable or decline slightly over the
next few months and into 1996. Consequently, the yield of the AARP High
Quality Money Fund may decline slightly as well.

14
<PAGE>

AARP High Quality Tax Free Money Fund

At a Glance

Fund Overview

The AARP High Quality Tax Free Money Fund is designed to offer you stability of
principal, along with income free from federal taxes.1 The quality of the Fund
is high enough to have secured a AAAm rating from Standard & Poor's (S&P).2 The
AARP High Quality Tax Free Money Fund is designed to maintain a $1.00 share
price, although there may be circumstances under which this goal cannot be
achieved. It is important to note that, unlike bank savings accounts, the Fund
is not insured or guaranteed by the U.S. Government, and yield will fluctuate.

1 It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Capital gains may be
subject to taxes as well.

2 The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.

For Whom the Fund is Designed

This Fund may be appropriate for investors seeking tax-free income or who do not
want the risk of investing in stocks or bonds. These investors include those
seeking money market income to meet regular day-to-day expenses, those needing
immediate access to their assets through free checkwriting, those creating a
diversified portfolio who want a portion of their assets in a conservative
investment designed to offer stability, and those seeking a short-term
investment prior to making longer-term investment choices.

Q How has the Fund performed?

A Over the past 12 months, the AARP High Quality Tax Free Money Fund provided
shareholders with modest returns and a rising yield. The Fund's 7-day net
annualized yield as of September 30, 1995 was 3.37% (which is a tax
equivalent yield of 5.58% for shareholders in the 39.6% tax bracket). This
was up from its 2.64% yield on September 30, 1994. The Fund's one-year
total return was 2.99%, which was made up entirely of income. The five-year
cumulative total return was 15.91%; the five-year average annualized total
return was 3.00%, the 10-year cumulative total return was 52.03%; and the
10-year average annualized total return was 4.28%.

Please note that the five- and ten-year figures include the performance of
the AARP Insured Tax Free Short Term Fund, which changed its name and
objective to the AARP High Quality Tax Free Money Fund on August 1, 1991.
Of course, past performance is not a guarantee of future results and yield
will fluctuate.

15
<PAGE>

Q What has been the Fund's investment strategy?

A Over the past 12 months, we lengthened the average maturity of the Fund to
approximately 55 days as of September 30, 1995. We decreased our holdings
of securities with maturities of three to six months, and increased our
investment in securities with maturities of six to 12 months. The longer
average maturity provided shareholders with higher yields as short-term
interest rates declined. We will not move longer than 55 days because the
average maturity of the Fund cannot exceed 60 days if we are to maintain
the S&P's AAAm rating. This is the highest rating S&P issues a Fund of this
type.

As always, all securities we bought over the past six months are rated
within the two highest quality ratings of at least one of the three leading
national independent rating firms: Fitch Investors Service Inc., Moody's
Investors Service Inc., or S&P. For those funds rated by S&P, there are
particular guidelines with which each fund must comply in order to maintain
its AAAm rating. In addition, within the universe of securities that fit
within the S&P criteria, Scudder credit analysts approve only a small
percentage of that universe. Therefore, the number of securities that we
have to choose from is much smaller and in most cases of better quality
than other tax-free money funds.

Q What can I expect from the Fund in the upcoming year?

A We believe the Fund should continue to provide investors in high tax
brackets with an alternative for their short-term investment needs.
However, we expect short-term interest rates to remain stable or decrease
slightly. The short-term municipal market should follow that trend.
Consequently, the yield of the AARP High Quality Tax Free Money Fund may
decline slightly.

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<PAGE>

AARP GNMA and U.S. Treasury Fund

At a Glance

Fund Overview

The AARP GNMA and U.S. Treasury Fund seeks to produce monthly income from a
conservatively managed high-quality portfolio. Although your principal is not
guaranteed as it is with an insured fixed-rate Certificate of Deposit (CD) or
savings account, the Fund is managed to help reduce share price fluctuation.
While the securities in the Fund are guaranteed as to the timely payment of
principal and interest, the guarantee is not related to the Fund's yield or
share price, both of which will fluctuate daily.

For Whom the Fund is Designed

The Fund is designed for conservative investors who want relatively high current
income and who seek a degree of protection from day-to-day share price
volatility. Investors should be seeking to invest for the longer term (at least
one to three years) and be comfortable with fluctuation in the value of their
principal and yield.

GROWTH OF A $10,000 INVESTMENT

Yearly AARP GNMA Lehman
Periods and U.S. Brothers
Ended Treasury Mortgage
Sept. 30 Fund++ GNMA Index+
---------------------------------------------------------------
1 Year $11,031 $11,407
5 Year $14,540 $15,606
10 Year $21,938 $26,277

LINE CHART:
Yearly Periods ended September 30++

CHART DATA:
AARP GNMA Lehman
and U.S. Brothers
Treasury Mortgage
Fund GNMA Index
-----------------------------------------------------------
85 10000 10000
86 11362 11784
87 11537 12013
88 12813 13820
89 13861 15384
90 15088 16837
91 17219 19635
92 19145 21878
93 20273 23320
94 19887 23035
95 21938 26277

TOTAL RETURN

Cumulative

---------------------------------------------------------------
Yearly AARP GNMA Lehman
Periods and U.S. Brothers
Ended Treasury Mortgage
Sept. 30 Fund++ GNMA Index+
---------------------------------------------------------------
1 Year 10.31% 14.07%
5 Year 45.40% 56.06%
10 Year 119.38% 162.77%

Average Annual

---------------------------------------------------------------
1 Year 10.31% 14.07%
5 Year 7.77% 9.30%
10 Year 8.17% 10.14%

ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION

LINE CHART:
Yearly Periods ended September 30++

CHART DATA:

AARP GNMA Lehman
and U.S. Brothers
Treasury Mortgage
Fund GNMA Index
-----------------------------------------------------------
1991 14.12 16.61
1992 11.19 11.43
1993 5.89 6.59
1994 -1.9 -1.22
1995 10.31 14.07

1991 1992 1993 1994 1995
-------------------------------------------------------------------------------
Net Asset Value $ 15.72 $ 16.19 $ 15.96 $ 14.73 $ 15.19
Income Dividends $ 1.26 $ 1.22 $ 1.15 $ 0.93 $ 1.01
Capital Gains $ -- $ -- $ -- $ -- $ --
Distributions
Fund Return (%) 14.12% 11.19% 5.89% -1.90% 10.31%
Index Return (%)+ 16.61% 11.43% 6.59% -1.22% 14.07%

+ The unmanaged Lehman Brothers Mortgage GNMA Index is a market value
weighted measure of all fixed-rate securities backed by mortgage pools of
the GNMA. Index returns are calculated monthly and assume reinvestment of
dividends. Unlike Fund returns, Index returns do not reflect any fees or
expenses.

++ All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return
and principal value will fluctuate so an investor's shares, when redeemed,
may be worth more or less than when purchased.

17
<PAGE>

Q How has the Fund performed?

A We believe the AARP GNMA and U.S. Treasury Fund performed well. The Fund's
share price on September 30, 1994 was $14.73; it increased to $15.19 on
September 30, 1995. Because of the Fund's conservative investment
philosophy (see investment strategy below), it usually outperforms similar
funds in a down bond market (when interest rates are rising) and
underperforms when the bond market rallies as it did over the past several
months. Therefore, the Fund's one-year total return of 10.31% (representing
7.19% in distributions of income and 3.12% in capital change)
underperformed the unmanaged Lehman Brothers Mortgage GNMA Index total
return of 14.07%. It is also important to note that an index return does
not reflect investment in cash or the deduction of any servicing,
investment management, or administration expenses as a mutual fund does.

The Fund's yield continued to provide higher yields than insured fixed-rate
12-month CDs. According to Banxquote, a weekly financial rate reporter, the
nationally averaged yield on the 12-month CD as of September 30, 1995 was
5.23% -- significantly lower than the 6.59% yield on the AARP GNMA and U.S.
Treasury Fund. (Keep in mind that yield does not take into consideration
the share price fluctuation of the Fund. Unlike the share price of the
Fund, the principal value of a CD remains constant. Past performance is not
a guarantee of future results.)

Q What has been the Fund's investment strategy?

A In order to provide more income to shareholders, we shifted assets from
shorter-term instruments into GNMA securities, which were selling at
attractive price levels. As of September 30, 1995, 77% of the portfolio was
invested in GNMA securities. We have emphasized lower-rate mortgages
because they provide a combination of high income with some protection from
prepayments (paying off a mortgage before it comes due). As of the end of
September, almost a third of total assets were in 7% to 7.50% coupon
mortgages.

The remainder of the portfolio (approximately 23%) was in short-term U.S.
Treasury obligations and cash equivalents with maturities of two years or
less. As you know, it has been an ongoing strategy to keep some of the
Fund's assets in shorter maturity bonds to help dampen share price
volatility.

Q What should I expect from the Fund in the upcoming year?

A We believe the Fund will continue to be a sound choice for conservative
investors, offering higher current income than many other comparable
alternatives, with a certain degree of protection from market volatility,
particularly compared to longer-term alternatives. As stated in the Letter
to Shareholders, we expect both short- and long-term interest rates to
remain relatively stable over the next year or perhaps decline a bit.
Combined with an attractive mortgage market, this should continue to
provide the high current income shareholders have come to expect.

18
<PAGE>

AARP High Quality Bond Fund

At a Glance

Fund Overview

The AARP High Quality Bond Fund offers you monthly income and the opportunity
for higher returns than you can expect from the AARP GNMA and U.S. Treasury
Fund. In pursuing higher returns, fluctuation in the value of your principal may
also be greater. The Fund has quality standards that are among the highest of
any general bond fund currently available, with at least 65% of the portfolio
invested in AAA-rated and AA-rated issues, and the other 35% in nothing less
than A-rated bonds.

For Whom the Fund is Designed

The Fund is designed for investors who want competitive returns from a portfolio
of high credit quality. Investors should be seeking to invest for the longer
term (at least one to three years) and be comfortable with fluctuation in the
value of their principal and yield. The AARP High Quality Bond Fund has the
potential to offer shareholders a greater total return than the AARP GNMA and
U.S. Treasury Fund. It will also be subject to greater price fluctuation.

GROWTH OF A $10,000 INVESTMENT

Yearly AARP High Lehman
Periods Quality Brothers
Ended Bond Fund++ Aggregate
Sept. 30 Bond Index+
-----------------------------------------------------------------------
1 Year $11,298 $11,406
5 Year $15,375 $15,848
10 Year $22,775 $25,917

LINE CHART
Yearly Periods ended September 30++

CHART DATA
AARP HIGH QUALITY LEHMAN BROTHERS
BOND FUND AGGREGATE BOND INDEX
----------------------------------------------------------------
85 10000 10000
86 11360 12028
87 11350 12060
88 12755 13664
89 14079 15203
90 14813 16353
91 17100 18969
92 19077 21349
93 21343 23479
94 20159 22722
95 22774 25917

TOTAL RETURN

Cumulative

-----------------------------------------------------------------------
Yearly AARP High Lehman
Periods Quality Brothers
Ended Bond Fund++ Aggregate
Sept. 30 Bond Index+
-----------------------------------------------------------------------
1 Year 12.98% 14.06%
5 Year 53.75% 58.48%
10 Year 127.75% 159.17%

Average Annual

-----------------------------------------------------------------------
1 Year 12.98% 14.06%
5 Year 8.98% 9.64%
10 Year 8.58% 9.99%

ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION

BAR CHART
Yearly Periods ended September 30++

CHART DATA

AARP HIGH QUALITY LEHMAN BROTHERS
BOND FUND AGGREGATE BOND
INDEX
------------------------------------------------------------------
1991 15.44 15.99
1992 11.56 12.55
1993 11.88 9.98
1994 -5.55 -3.22
1995 12.98 14.06

1991 1992 1993 1994 1995
-------------------------------------------------------------------------------
Net Asset Value $ 15.71 $ 16.44 $ 17.19 $ 15.05 $ 16.01
Income Dividends $ 1.10 $ 1.03 $ 0.93 $ 0.85 $ 0.93
Capital Gains Distributions $ -- $ -- $ 0.18 $ 0.38 $ --
Fund Return (%) 15.44% 11.56% 11.88% -5.55% 12.98%
Index Return (%)+ 15.99% 12.55% 9.98% -3.22% 14.06%

+ The unmanaged Lehman Brothers Aggregate Bond Index is a market value
weighted measure of treasury issues, agency issues, corporate bond issues
and mortgage securities. Index returns are calculated monthly and assume
reinvestment of dividends. Unlike Fund returns, Index returns do not
reflect any fees or expenses.

19
<PAGE>

Q How has the Fund performed?

A We believe the AARP High Quality Bond Fund performed well over the past 12
months as long-term interest rates declined. Long-term interest rates, as
measured by the 30-year U.S. Treasury Bond, declined from 7.81% on
September 30, 1994 to 6.57% on September 30, 1995. As a result, the value
of the securities held by the Fund increased. The Fund's share price
increased from $15.05 to $16.01 over this period. The Fund's one-year total
return was 12.98%, with 6.60% representing distributions of income and
6.38% capital change. Its one-year total return underperformed the
unmanaged Lehman Brothers Aggregate Bond Index return of 14.06%. The Fund's
underperformance was due to its conservative investment strategy designed
to moderate share price fluctuation. It is also important to note that an
index return does not reflect investment in cash or the deduction of any
servicing, investment management, or administration expenses, as a mutual
fund does.

Q What has been the Fund's investment strategy?

A In the last quarter of 1994, the Fund focused on bonds at the shorter and
longer ends of the maturity spectrum. This strategy was designed to provide
a sound mix of competitive yields and limited price fluctuation in an
environment of unstable but generally rising interest rates. Since the
beginning of 1995, however, our strategy began to shift toward
intermediate-term bonds. This revised strategy is in keeping with our
outlook for a steeper yield curve, which is when short-term yields decline
faster than long-term yields. Intermediate-term bonds usually perform well
in this environment.

We also increased the Fund's investment in mortgage-backed securities to
42% of the portfolio to boost the Fund's total return. As previously
discussed on page 18, we believe that lower-rate mortgage-backed securities
offer an attractive combination of high income and good quality at current
market levels. A majority of the mortgage securities we held in the
portfolio had coupons ranging from 7% to 7.50%. We also increased the
Fund's investment in corporate bonds to 23% of the portfolio. The corporate
sector included issues from some of the country's leading consumer staples,
durable goods manufacturing, financial, and transportation companies.

As of September 30, 1995, 66% of the portfolio was invested in government,
AAA-rated or AA-rated securities; 23% of the Fund was invested in A-rated
bonds; and 11% was in cash equivalents.

Q What should I expect from the Fund in the upcoming year?

A As stated in the Letter to Shareholders, we expect both short- and
long-term interest rates to remain relatively stable over the next year or
perhaps decline a bit. We believe that the AARP High Quality Bond Fund is
positioned for possible lower interest rates with increased exposure to
intermediate-term issues. This Fund should continue to provide shareholders
with high income and less share price fluctuation than a long-term bond.

20
<PAGE>

AARP Insured Tax Free General Bond Fund

At a Glance

Fund Overview

The AARP Insured Tax Free General Bond Fund seeks to pay high monthly income
that is free from federal taxes.* The Fund invests in a portfolio consisting
primarily of high-grade municipal securities that are insured against default.
This insurance does not apply to the value of your shares or the yield of the
Fund, both of which will fluctuate daily. The Fund also aims to keep the value
of its shares more stable than that of a long-term municipal bond.

* It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Gains on sales of
Fund shares and distributions of capital gains generally will be subject to
federal, state and local taxes.

For Whom the Fund is Designed

The Fund is designed for investors in higher tax brackets who want income that
is free from federal income taxes. Investors should be seeking to invest for the
longer term (at least one to three years) and be comfortable with fluctuation in
the value of their principal and yield.

GROWTH OF A $10,000 INVESTMENT

---------------------------------------------------
Yearly AARP
Periods Insured Lehman
Ended Tax Free Brothers
Sept. 30 General Municipal
Bond Fund++ Bond Index+
---------------------------------------------------
1 Year $11,021 $11,118
5 Year $15,074 $15,289
10 Year $22,913 $25,121

LINE CHART
Yearly Periods ended September 30++

CHART DATA
AARP INSURED TAX FREE LEHMAN BROTHERS
GENERAL BOND FUND MUNICIPAL BOND
INDEX
-------------------------------------------------------------------------
85 10000 10000
86 11796 12465
87 11449 12530
88 13096 14156
89 14492 15385
90 15200 16431
91 17305 18598
92 19038 20542
93 21764 23160
94 20790 22594
95 22913 25121

TOTAL RETURN

Cumulative
---------------------------------------------------
Yearly AARP
Periods Insured Lehman
Ended Tax Free Brothers
Sept. 30 General Municipal
Bond Fund++ Bond Index+
---------------------------------------------------
1 Year 10.21% 11.18%
5 Year 50.74% 52.89%
10 Year 129.13% 151.21%

Average Annual

---------------------------------------------------
1 Year 10.21% 11.18%
5 Year 8.55% 8.86%
10 Year 8.64% 9.64%

ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION

LINE CHART
Yearly Periods ended September 30++

CHART DATA

AARP
INSURED LEHMAN BROTHERS
TAX FREE MUNICIPAL BOND
GENERAL BOND FUND INDEX
-------------------------------------------------------------------------
1991 13.85 13.19
1992 10.01 10.45
1993 14.31 12.74
1994 -4.48 -2.44
1995 10.21 11.18

1991 1992 1993 1994 1995
-------------------------------------------------------------------------------
Net Asset Value $ 17.30 $ 17.88 $ 19.00 $ 16.93 $ 17.74
Income Dividends $ 1.00 $ 0.93 $ 0.90 $ 0.86 $ 0.87
Capital Gains Distributions $ -- $ 0.17 $ 0.43 $ 0.40 $ --
Fund Return (%) 13.85% 10.01% 14.31% -4.48% 10.21%
Index Return (%)+ 13.19% 10.45% 12.74% -2.44% 11.18%

+ The unmanaged Lehman Brothers Municipal Bond Index is a market value
weighted measure of municipal bonds with a maturity of at least two years.
Index returns are calculated monthly and assume reinvestment of dividends.
Unlike Fund returns, Index returns do not reflect any fees or expenses.

21
<PAGE>

Q How has the Fund performed?

A We believe the AARP Insured Tax Free General Bond Fund performed well over
the past 12 months as long-term interest rates declined. Long-term interest
rates, as measured by the 30-year U.S. Treasury Bond, declined from 7.81%
on September 30, 1994 to 6.57% on September 30, 1995. As a result, the
value of the securities held by the Fund increased. The Fund's share price
increased from $16.93 to $17.74 over this period.

The Funds one-year total return was 10.21%, with 5.43% representing
distributions of income and 4.78% in capital change. The one-year total
return underperformed the unmanaged Lehman Brothers Municipal Bond Index's
return of 11.18%, due in large part to the Fund's conservative investment
approach to moderate share price volatility.

Q What has been the Fund's investment strategy?

A Over the past 12 months, the portfolio management team gradually shifted a
portion of the portfolio from long-term bonds with maturities of over 20
years to bonds with maturities under 15 years. As of September 30, 1995,
42% of the portfolio was invested in intermediate-term bonds maturing in 10
to 15 years. The reallocation added to the Fund's favorable performance
over the past few months, because bonds with maturities in the 15-year
range that were noncallable performed better than longer-term bonds that
were priced close to par.

In addition, as of September 30, 1995, 90% of the portfolio was invested in
insured securities (or securities escrowed in U.S. Treasurys which provide
the backing of the U.S. Government). Remember that this insurance protects
the bond from default but does not apply to the value of your shares or to
the yield of the Fund, both of which will fluctuate daily. Within the
portfolio, the largest sector of the Fund (22%) was in insured hospital
bonds, which we believe were undervalued bonds. As always, we invested in
securities rated within the top three ratings by Moody's Investors Services
Inc. and Standard & Poor's -- two independent rating services.

Q What should I expect from the Fund in the upcoming year?

A Over the longer term, we expect interest rates to remain relatively stable
or decline a bit. The revised positions of the portfolio will continue to
take advantage of this environment. Therefore, the Fund should provide
shareholders with high income free from federal taxes and will seek to keep
its share price more stable than that of a long-term municipal bond. We
believe that the municipal bond market will follow the trend of the taxable
bond market, with a positive long-term outlook.

22
<PAGE>

AARP Balanced Stock and Bond Fund

At a Glance

Fund Overview

Through a combination of stocks, bonds, and cash reserves, the AARP Balanced
Stock and Bond Fund seeks to offer you long-term growth of capital and quarterly
income. The Fund attempts to keep the value of its shares more stable than other
potentially higher returning, higher risk balanced mutual funds.

For Whom the Fund is Designed

This Fund is designed for investors who are seeking long-term growth of their
assets, but who want less risk than an investment solely in stocks. Investors
should be able to invest for the longer term (three to five years or more) and
be comfortable with the value of their principal fluctuating up and down.

GROWTH OF A $10,000 INVESTMENT

Blended
Index:
Yearly AARP S&P (50%);
Periods Balanced LBAB (40%);
Ended Stock and 3-Month
Sept. 30 Bond Fund++ T Bill (10%)
-----------------------------------------------------------------------
1 Year $11,680 $12,043
Life of Fund* $11,589 $11,826

LINE CHART
Quarterly Periods from February 1, 1994 to September 30, 1995++

CHART DATA

AARP BALANCED STANDARD & POOR'S LEHMAN BROTHERS
STOCK AND 500 STOCK PRICE AGGREGATE BOND
BOND FUND INDEX INDEX BLENDED INDEX
- --------------------------------------------------------------------------------
10000 10000 10000 10000
9520 9304 9584 9492
9623 9344 9485 9481
9922 9800 9543 9744
9837 9799 9579 9772
10335 10753 10062 10457
11077 11779 10675 11230
11589 12716 10885 11797

TOTAL RETURN

Cumulative

Average Annual

-----------------------------------------------------------------------
1 Year 16.80% 20.43%
Life of Fund* 9.28% 10.65%

ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION

BAR CHART
Yearly Periods ended September 30++

CHART DATA

Blended
Index:
AARP S&P (50%);
Balanced LBAB (40%);
Stock and 3-Month
Bond Fund++ T Bill (10%)
------------------------------------------------------
1994* -0.78 -3.83
1995 16.80 21.06

1994* 1995
-----------------------------------------------------------
Net Asset Value $ 14.64 $ 16.40
Income Dividends $ 0.24 $ 0.60
Capital Gains Distributions $ -- $ 0.04
Fund Return (%) -0.78% 16.80%
Blended Index Return (%)+ -3.83% 20.43%

+ The performance of the blended benchmark is a weighting comprised of 50%
Standard & Poor's 500 Stock Price Index (S&P), 40% Lehman Brothers
Aggregate Bond Index (LBAB), and the 3-Month Treasury Bill Index (10%). The
50/40/10 measure is meant to reflect the anticipated long range asset mix
of the Fund, which may change over time. The unmanaged Standard & Poor's
500 Stock Price Index is a market value-weighted measure of 500 widely held
common stocks listed on the New York Stock Exchange, American Stock
Exchange, and Over-the-Counter market. The unmanaged Lehman Brothers
Aggregate Bond Index is a market value-weighted measure of treasury issues,
agency issues, corporate bond issues and mortgage securities. Index returns
are calculated monthly and assume reinvestment of dividends. Unlike Fund
returns, Index returns do not reflect any fees or expenses.

* The Fund commenced operations on February 1, 1994.

23
<PAGE>

Q How has the Fund performed?

A We believe the AARP Balanced Stock and Bond Fund performed well over the
past 12 months. The Fund's share price was $14.64 on September 30, 1994; it
increased to $16.40 on September 30, 1995. Its one-year total return was
16.80%, with 4.47% representing distributions of income and 12.33%
representing capital change. By comparison, the unmanaged Standard & Poor's
500 Stock Price Index and the unmanaged Lehman Brothers Aggregate Index
posted returns of 29.75% and 14.06%, respectively. (Please note that the
Fund was introduced on February 1, 1994. Therefore, five-year and ten-year
data are not available.) The Fund's performance, while strong, did not
match that of the blended index primarily because of the Fund's lack of
exposure to technology stocks (refer to the investment strategy of the AARP
Growth and Income Fund on page 27 for details on the outperformance of
technology stocks) and its underweighting in intermediate-term bonds -- the
best performing fixed-income group for most of 1995.

Q What has been the Fund's investment strategy?

A In general, the stock portion of the Fund (representing 55% of the
portfolio as of September 30, 1995) uses an approach similar to the AARP
Growth and Income Fund. The Fund will usually invest in stocks that are
believed to have favorable long-term capital appreciation outlooks and have
above-average dividend yields. Since the stock portion of the Fund is
managed by the same individuals and with the same strategy as the AARP
Growth and Income Fund, refer to the AARP Growth and Income Fund Report on
page 27 for details on specific stock selection. (The Fund may invest up to
70% of its assets in stocks.)

The portion of the Fund invested in bonds (representing 30% of the
portfolio as of September 30, 1995) can include corporate issues, U.S.
Government securities, mortgage-backed obligations, and other fixed-income
securities. At least 75% of these securities will be securities rated
within the three highest quality ratings (AAA, AA, A) by Moody's or
Standard & Poor's, independent rating organizations. (At all times, at
least 30% of the Fund's assets will be invested in a combination of bonds
and cash equivalents.) At the beginning of the fiscal period, the Fund
focused on bonds at the shorter and longer ends of the maturity spectrum.
Our strategy began to shift mid-year toward intermediate-term bonds.
Reallocating the portfolio to focus on intermediate-term bonds was in
anticipation of a steeper yield curve (short-term yields declining faster
than long-term yields) as the Federal Reserve Board moved to a more
accommodative policy of lower rates. The Fed demonstrated this intent by
lowering short-term interest rates in July.

24
<PAGE>

The remaining portion of the Fund's assets was invested in cash
equivalents.

Q What can I expect from the Fund in the upcoming year?

A For the remainder of 1995, we believe that our disciplined investment
approach should continue to provide exposure to the long-term benefits of a
diversified portfolio of stocks and bonds. The current asset allocation for
the Fund is 55% stocks, 30% bonds, and 15% cash equivalents. However, this
allocation may be gradually changed depending upon our expectations for the
financial markets. Since the AARP Balanced Stock and Bond Fund is invested
more heavily in stocks, we will concentrate on trends in the stock market
and how they may affect the Fund.

25
<PAGE>

AARP Growth and Income Fund

At a Glance

Fund Overview

The AARP Growth and Income Fund is a conservatively managed stock fund that
provides the potential for long-term growth and quarterly income, while still
seeking to moderate risk. It invests in above-average dividend-yielding stocks
that may offer the opportunity for long-term growth of capital.

For Whom the Fund is Designed

The Fund is suitable for investors who are seeking long-term growth of their
assets and the opportunity to keep ahead of inflation. Investors should be able
to invest for the longer term (three to five years or more) and be comfortable
with fluctuation in the value of their principal that is associated with
investing in stocks.

GROWTH OF A $10,000 INVESTMENT

Yearly AARP Standard
Periods Growth and & Poor's
Ended Income 500 Stock
Sept. 30 Fund++ Price Index+
---------------------------------------------------------
1 Year $12,043 $12,975
5 Year $22,033 $22,143
10 Year $38,903 $44,259

LINE CHART
Yearly Periods ended September 30++

CHART DATA
AARP GROWTH STANDARD &
AND INCOME POOR'S 500
FUND STOCK PRICE
INDEX
-----------------------------------------------------------
85 10000 10000
86 12900 13174
87 16884 18894
88 15064 16558
89 19661 22023
90 17657 19988
91 22457 26217
92 25058 29114
93 29914 32900
94 32303 34112
95 38903 44259

TOTAL RETURN

Cumulative

Yearly AARP Standard
Periods Growth and & Poor's
Ended Income 500 Stock
Sept. 30 Fund++ Price Index+
---------------------------------------------------------

1 Year 20.43% 29.75%
5 Year 120.33% 121.43%
10 Year 289.03% 342.59%

Average Annual

-----------------------------------------------------

1 Year 20.43% 29.75%
5 Year 17.12% 17.22%
10 Year 14.55% 16.03%

ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION

BAR CHART
Yearly Periods ended September 30++

CHART DATA

AARP GROWTH STANDARD & POOR'S
AND INCOME 500 STOCK PRICE
FUND INDEX
------------------------------------------------------------------
1991 27.19 31.09
1992 11.59 11.04
1993 19.38 12.97
1994 7.99 3.68
1996 20.43 29.75

1991 1992 1993 1994 1995
-------------------------------------------------------------------------------
Net Asset Value $ 26.97 $ 28.67 $ 32.91 $ 34.13 $ 38.36
Income Dividends $ 1.17 $ 0.90 $ 0.87 $ 1.13 $ 1.09
Capital Gains $ 0.05 $ 0.48 $ 0.30 $ 0.21 $ 1.23
Distributions
Fund Return (%) 27.19% 11.59% 19.38% 7.99% 20.43%
Index Return (%)+ 31.09% 11.04% 12.97% 3.68% 29.75%

+ The unmanaged Standard & Poor's 500 Stock Price Index is a market value
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-the-Counter market. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.

26
<PAGE>

Q How has the Fund performed?

A We believe the AARP Growth and Income Fund performed well. The Fund's share
price was $34.13 on September 30, 1994; it increased to $38.36 on September
30, 1995. The Fund's one year total return was 20.43%, with 3.69%
representing distributions of income and 16.74% in capital change. Its
one-year total return underperformed the unmanaged Standard & Poor's 500
Stock Price Index return of 29.75%. This underperformance was due primarily
to our lack of exposure to the technology sector. (See investment strategy
section below.)

Q What has been the Fund's investment strategy?

A The AARP Growth and Income Fund has had a consistent investment strategy
since its inception. We continue to target stocks that have dividend yields
that are at least 20% above the average market yield at the time of
purchase. Our strict valuation discipline focuses our attention on those
companies whose fundamental outlooks may have been misperceived by
investors, as reflected by such stocks' higher than average relative
dividend yields. This strict discipline, which has contributed to the
Fund's long-term success, sometimes precludes us from investing in certain
sectors of the market.

Technology stocks -- the best performing sector of the market in 1995 (up
over 60% for the year ended September 30, 1995) -- are characterized by a
high degree of price volatility and minimal or nonexistent dividends. As
such, they do not fit into our investment universe. This sector represents
over 10% of the S&P 500 and has been the market leader for close to a year
and a half. History continually shows us that enthusiasm for a particular
group (such as technology) can last for a period of time, but eventually
all positive expectations get priced into the stocks and cause them to
underperform. This was the case for oil stocks in the 1970s, defense stocks
in the mid-1980s, and pharmaceutical stocks in the early 1990s. Our
discipline may cause us to miss some of the upswings, but it protects us
from the downturns. We often reevaluate these groups when the rest of the
market has given up on them and their prices are low.

During the last year, we continued to shift the portfolio from stocks that
are economically sensitive to those with more long-term consistent growth.
We favored the health, finance, manufacturing, and energy sectors. The
portfolio has benefited significantly from the dramatic outperformance of
its manufacturing and durable goods holdings as well as superior
performance from many of the financial holdings in the Fund. The
manufacturing and durable good sectors are overweighted in the portfolio
relative to the unmanaged S&P 500 Index. Aerospace stocks such as United

27
<PAGE>

Technologies and Lockheed Martin posted strong returns during the period,
as fears of recession subsided and earnings growth continued to rise.
United Technologies (now the Fund's top holding) also benefited from the
strengthening commercial aerospace recovery, which aided revenues and
operating income even more than expected.

The financial sector was the second best performing U.S stock market group
in the first half of this year, led by stocks such as Student Loan
Marketing Association (Sallie Mae) which is the Fund's second largest
holding. Sallie Mae posted superior returns during the period as support
waned for the controversial plan enabling direct student lending by the
federal government. In addition, Chemical Bank and First Bank have
benefited from continued cost cutting and consolidation in the banking
industry.

Convertibles were also used to enhance the total return of the Fund.
Convertibles are bonds or preferred stocks that can be exchanged at the
option of the investor into a specified number of shares of the issuing
company's common stock. As such, their prices are directly influenced by
the performance of the common stock. Because convertibles typically provide
higher income and have less fluctuation than their underlying stocks,
finding attractively priced convertibles is often difficult. We purchased a
convertible issued by Mitsubishi Bank toward the end of the fiscal period
which we believe offers much upside potential with a very attractive
downside protection feature.

The Fund's portfolio management team employs a disciplined process for
sales as well as purchases. If a stock's yield drops below 75% of the S&P
500's yield or if the fundamental outlook for the company has changed or if
the valuation is full (i.e., positive expectations are reflected into its
price) the holding is sold. This approach led to the elimination of Parker
Hannifin because of its yield and the reduction of Eli Lilly and Warner
Lambert as their prices are fairly valued. Proceeds from these sales were
used to purchase stocks that have, in our opinion, more attractive total
return prospects.

(Please note that portfolio changes should not be considered
recommendations for action by individual investors.)

Q What should I expect from the Fund in the upcoming year?

A For the remainder of 1995 and beyond, we believe that our disciplined
investment approach is an attractive way for investors to have exposure to
the long-term benefits of stocks. Our aim in managing the Fund is to
provide a positive total return when the stock market is rising, while
attempting to shield the portfolio when the stock market is declining. (In
1994, shielding the portfolio proved to be beneficial, and we were pleased
to have helped investors avoid many of the stock market's downturns.)
Though there may be some short-term volatility, we continue to believe that
stocks will outperform bonds and cash equivalents over the longer term.

28
<PAGE>

AARP Capital Growth Fund

At a Glance

Fund Overview

The AARP Capital Growth Fund is designed to help investors take advantage of the
high growth potential of stocks while attempting to keep the value of its shares
more stable than other potentially higher-returning, higher-risk capital growth
mutual funds.

For Whom the Fund is Designed

The Fund is designed for investors seeking long-term growth of their principal.
Investors should be able to invest for the longer term (five years or more) and
be comfortable with the short-term fluctuation of their principal that is
associated with investing in stocks.

GROWTH OF A $10,000 INVESTMENT

Yearly AARP Standard
Periods Capital & Poor's
Ended Growth 500 Stock
Sept. 30 Fund++ Price Index+
-----------------------------------------------------
1 Year $ 12,347 $ 12,975
5 Year $ 21,750 $ 22,143
10 Year $ 37,388 $ 44,259

LINE CHART

Yearly Periods ended September 30++

CHART DATA

STANDARD & POOR'S
AARP CAPITAL 500 STOCK
GROWTH FUND PRICE INDEX
-----------------------------------------------------
85 10000 10000
86 12658 13174
87 17337 18894
88 16387 16558
89 23535 22023
90 17189 19988
91 24547 26217
92 25515 29114
93 31773 32900
94 30281 34112
95 37388 44259

TOTAL RETURN

Cumulative

---------------------------------------------------

Yearly AARP Standard
Periods Capital & Poor's
Ended Growth 500 Stock
Sept. 30 Fund++ Price Index+
-----------------------------------------------------
1 Year 23.47% 29.75%
5 Year 117.50% 121.43%
10 Year 273.88% 342.59%

Average Annual

---------------------------------------------------
1 Year 23.47% 29.75%
5 Year 16.81% 17.22%
10 Year 14.10% 16.03%

ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION

BAR CHART

Yearly Periods ended September 30++

CHART DATA

STANDARD & POOR'S
AARP CAPITAL 500 STOCK
GROWTH FUND PRICE INDEX
------------------------------------------------
1991 42.81 31.09
1992 3.94 11.04
1993 24.53 12.97
1994 -4.70 3.68
1995 23.47 29.75

1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------
Net Asset Value $ 30.23 $ 30.30 $ 36.20 $ 31.74 $ 38.36
Income Dividends $ 0.59 $ 0.23 $ 0.14 $ 0.05 $ 0.01
Capital Gains
Distributions $ 1.79 $ 0.94 $ 1.21 $ 2.90 $ 0.64
Fund Return (%) 42.81% 3.94% 24.53% -4.70% 23.47%
Index Return (%)+ 31.09% 11.04% 12.97% 3.68% 29.75%

29
<PAGE>

Q How has the Fund performed?

A We believe the AARP Capital Growth Fund performed well over the past 12
months. The Fund's share price increased from $31.74 on September 30, 1994
to $38.36 on September 30, 1995. The Fund's one-year total return was
23.47% with .04% representing distributions of income and 23.43% in capital
change. Its one-year return underperformed the unmanaged Standard & Poor's
500 Stock Price Index return of 29.75% because, unlike most other growth
funds, the AARP Capital Growth Fund seeks to moderate share price
fluctuation and therefore may underperform the index when the stock market
strongly advances.

Q What has been the Fund's investment strategy?

A Over the past year, we began to shift to a more diversified, higher-quality
portfolio by increasing our position in the health, financial, and energy
sectors and reducing many of our holdings in the communications, gaming,
and media sectors. Specifically, we reduced our position in Time Warner,
Tele-Communications, and Viacom and eliminated our positions in Comcast,
LIN Broadcasting, and Rogers Communications.

We used the proceeds from the sale of such securities to purchase stocks
within the health, financial, and energy sectors. We anticipate attractive
earnings growth in stocks such as Franklin Resources, Merck, and American
International Group. We also purchased Capital Cities, Philips Electronics,
and Hewlett-Packard. Many of these purchases were made early in the year,
and we have already seen considerable appreciation. Capital Cities, for
example, has benefited from the announcement of the proposed Capital Cities
and Disney merger. (We also owned Disney, which appreciated as a result of
the proposed merger.)

In addition, the portfolio has benefited significantly from the dramatic
outperformance of most of its technology stocks such as Compaq Computer,
Hewlett-Packard (the Fund's second largest holding), Intel, and Texas
Instruments. Technology stocks were up over 60% for the year ended
September 30, 1995. As of September 30, 1995, approximately 15% of the
portfolio was invested in technology stocks. It is important to note that
this 15% allocation is significantly lower than the average for most other
growth stock funds. Since technology stocks are characterized by a high
degree of share price volatility, large investments in this sector would
not meet our investment criteria.

(Please note that portfolio changes should not be considered
recommendations for action by individual investors.)

30
<PAGE>

Q What can I expect from the Fund in the upcoming year?

A Despite some inevitable short-term volatility, we believe that the AARP
Capital Growth Fund's strategy of high-quality and diversification may
provide investors with the opportunity for long-term growth with less risk
-- in terms of share price fluctuation -- than other more aggressive growth
funds.

31
<PAGE>

BLANK PAGE

32
<PAGE>

Investment Portfolios,

Financial Statements

and Additional

Information

33
<PAGE>

AARP HIGH QUALITY MONEY
FUND

LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1995

<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
<S> <C>
REPURCHASE AGREEMENTS 9.0%

4,445,000 Repurchase Agreement with State Street Bank and Trust Company
dated 9/29/95 at 6.1% to be repurchased at $4,447,260 on 10/2/95,
collateralized by a $4,730,000 U.S. Treasury Bill, 6/27/96 .................. 4,445,000

30,000,000 Repurchase Agreement with Union Bank of Switzerland dated 9/29/95 at
6.05% to be repurchased at $30,015,125 on 10/2/95, collateralized
by a $28,500,000 U.S. Treasury Note, 7.25%, 8/15/22 ......................... 30,000,000
-----------

Total Repurchase Agreements (Cost $34,445,000) ................................ 34,445,000
-----------
COMMERCIAL PAPER 38.3%

Health 3.0%
Pharmaceuticals
11,500,000 Warner Lambert Co., 5.58%, 12/18/95 ........................................... 11,355,483
-----------

Communications 4.4%
Telephone/Communications
10,000,000 American Telephone & Telegraph Co., 6.03%, 10/3/95 ............................ 9,996,650
7,000,000 American Telephone & Telegraph Co., 5.58%, 1/5/96 ............................. 6,893,040
-----------
16,889,690
-----------

Financial 27.1%
Banks 9.0%
10,000,000 Barclays U.S. Funding Corp., 5.74%, 10/31/95 .................................. 9,951,250
10,000,000 Deutsche Bank Financial Inc., 5.52%, 3/11/96 .................................. 9,742,150
15,000,000 Norwest Corp., 5.63%, 1/3/96 .................................................. 14,775,575
-----------
34,468,975
-----------

Insurance 3.9%
15,000,000 Prudential Funding Corp., 5.71%, 10/26/95 ..................................... 14,940,521
-----------
Other Financial Companies 12.9%
10,000,000 Associates Corp. of North America, 5.73%, 10/6/95 ............................. 9,992,042
15,000,000 Ciesco L.P., 5.71%, 11/1/95 ................................................... 14,924,437
15,000,000 Dresdner U.S. Finance, 5.6%, 12/19/95 ......................................... 14,809,083
10,000,000 Transamerica Finance Corp., 5.62%, 1/12/96 .................................... 9,836,058
-----------
49,561,620
-----------

Miscellaneous 1.3%
5,000,000 CIT Group Holdings Inc., 5.73%, 10/4/95 ....................................... 4,999,988
-----------

Durables 3.8%
Automobiles
15,000,000 Ford Motor Credit Corp., 5.65%, 12/29/95 ...................................... 14,787,513
-----------

Total Commercial Paper (Cost $147,040,874) .................................... 147,003,790
-----------

U.S. GOVERNMENT AGENCIES 34.0%
17,000,000 Federal National Mortgage Association, 5.149%, 7/14/99* ....................... 16,762,000
25,000,000 Student Loan Marketing Association, 3.17%, 4/16/96* ........................... 25,045,750

</TABLE>

The accompanying notes are an integral part of the financial statements.

34
<PAGE>
<TABLE>
<CAPTION>

Principal
Amount ($) Value ($)

<S> <C>
20,000,000 Student Loan Marketing Association, 4.675%, 11/27/96* ......................... 20,018,000
23,690,000 Student Loan Marketing Association, 4.14%, 1/23/97* ........................... 23,697,403
15,000,000 Student Loan Marketing Association, 4.28%, 1/23/97* ........................... 15,004,688
10,000,000 Student Loan Marketing Association, 3.39%, 10/30/97* .......................... 10,007,800
20,500,000 Student Loan Marketing Association, 5.14%, 7/12/99* ........................... 20,233,500
-----------
Total U.S. Government Agencies (Cost $131,232,329)............................. 130,769,141
-----------
MEDIUM-TERM AND SHORT-TERM NOTES 18.0%

Financial 12.3%
Banks 11.0%
5,000,000 Comerica Bank, Note, 6.2%, 5/28/96 ............................................ 5,007,388
17,000,000 Harris Trust and Savings Bank, Note, 5.74%, 11/28/95 .......................... 16,999,219
10,000,000 J.P. Morgan & Co., Inc., 6.2%, 5/13/96 ........................................ 10,037,498
10,000,000 NBD Bank, NA, Medium Term Note, 6.15%, 6/3/96 ................................. 10,022,487
-----------
42,066,592
-----------
Other Financial Companies 1.3%
5,000,000 General Electric Capital Corp. Medium Term Note, 4.73%, 3/18/96 .............. 4,949,456
-----------
Manufacturing 2.0%
Electrical Products
7,765,000 General Electric Co. Global debenture, 7.875%, 5/1/96 ........................ 7,853,735
-----------
Energy 3.7%
Oil & Gas Production 2.6%
10,000,000 Shell Oil Co., 5.88%, 10/3/95 ................................................. 9,996,733
Oilfield Services/Equipment 1.1% -----------
4,160,000 California Petroleum Transportation Corp. 1st Mortgage, 6.71%, 4/1/96 ......... 4,177,924
-----------
Total Medium-Term and Short-Term Notes (Cost $69,034,883) ...................... 69,044,440
-----------

SUMMARY % OF NET ASSETS

Total Investment Portfolio (Cost $381,753,086) (a).................. 99.3 381,262,371
Other Assets and Liabilities, Net 0.7 .............................. 0.7 2,633,681
---- -----------
Net Assets.......................................................... 100.0 383,896,052
===== ===========
* Floating rate notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon equivalent of the
U.S. Treasury bill rate. These securities are shown at their rate as of
September 30, 1995.

(a) At September 30, 1995, the net unrealized depreciation on investments based
on cost for federal income tax purposes of $381,753,086 was as follows:

Aggregate gross unrealized appreciation for all investments in which there
is an excess of value over tax cost....................................................... $ 111,758

Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value....................................................... (602,473)
-----------
Net unrealized depreciation............................................................... $ (490,715)
===========
</TABLE>
- --------------------------------------------------------------------------------
From November 1, 1994 through September 30, 1995, the Fund incurred
approximately $66,921 of net realized capital losses which the Fund intends
to elect to defer and treat as arising in the fiscal year ended September
30, 1996.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements.

<PAGE>

AARP HIGH QUALITY TAX FREE
MONEY FUND

LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1995

Principal Credit
Amount($) Rating (b) Value($)
<S> <C> <C> <C>
MUNICIPAL INVESTMENTS 99.2%

ALASKA
Alaska Housing Finance Corp., General Mortgage Revenue, 1991 Series A,
Weekly Demand Note, 4.4%, 6/1/26* ........................................ 3,000,000 A-1+ 3,000,000

ARIZONA
Apache County, AZ, Industrial Development Authority, Tucson Electric
Power Co., 1983 Series C, Weekly Demand Note, 4.45%, 12/15/18* ...... 1,000,000 A-1+ 1,000,000
Maricopa County, AZ, Pollution Control Revenue, Public Service of
New Mexico, Weekly Demand Note, 4.4%, 11/1/22* ...................... 4,000,000 A-1+ 4,000,000
Pima County, AZ, Industrial Development Authority, Tucson Electric
Power Co., Weekly Demand Note, 4.4%, 10/1/22* ....................... 3,900,000 A-1 3,900,000
Pinal County, AZ, Pollution Control Revenue, Magma Copper, Series:
1984, Daily Demand Note, 4.8%, 12/1/09* ............................. 700,000 A-1+ 700,000
Weekly Demand Note, 4.4%, 12/1/11* .................................. 1,900,000 A-1+ 1,900,000
Salt River, AZ, Agricultural Improvement District, Tax Exempt
Commercial Paper, 3.7%, 10/20/95 .................................... 2,000,000 A-1+ 2,000,000

CALIFORNIA
Butte Office of Education, CA, Tax and Revenue Anticipation Notes,
5%, 10/27/95 ........................................................ 1,000,000 SP-1+ 1,000,546
California General Obligation, Revenue Anticipation Warrants,
Series C, 5.75%, 4/25/96 ............................................ 2,500,000 MIG1 2,517,868
California School, Cash Reserve Program Authority, 1995 Series A,
4.75%, 7/3/96 (c) ................................................... 1,000,000 SP-1+ 1,007,264
Contra Costa, CA, Transportation Authority, Sales Tax Revenue,
Series A, Weekly Demand Note, 3.9%, 3/1/09* (c) ..................... 2,700,000 MIG1 2,700,000
Fontana, CA, Unified School District, Tax and Revenue Anticipation
Note, 4.5%, 7/5/96 .................................................. 2,380,000 SP-1+ 2,386,048
Los Angeles County, CA, Local Educational Agencies Pool, Tax
and Revenue Anticipation Note, 4.75%, 7/5/96 ........................ 2,000,000 SP-1+ 2,009,475
Los Angeles County, CA, Tax and Revenue Anticipation Note, 4.5%, 7/1/96 ..... 1,500,000 MIG1 1,507,565
Orange County, CA, Water District, Public Facilities Corporation,
Tax Exempt Commercial Paper:
3.8%, 11/20/95 .............................................. 1,500,000 P-1 1,500,000
3.8%, 12/7/95 ............................................... 1,000,000 P-1 1,000,000
South Coast, CA, Local Education Agency Pools, Tax and Revenue
Anticipation Note, 5%, 8/14/96 ...................................... 1,000,000 SP-1+ 1,004,156

COLORADO
Clear Creek County, CO, Colorado Counties Financing Program,
Series 1988, Weekly Demand Note, 4.4%, 6/1/98* ...................... 305,000 A-1+ 305,000

DISTRICT OF COLUMBIA
District of Columbia, General Obligation, Refunding Bonds, Series A-1,
Daily Demand Note, 3.7%, 10/1/07* ................................... 1,900,000 MIG1 1,900,000

FLORIDA
Dade County, FL, Industrial Development Authority Revenue, Dolphins
Stadium Project, Weekly Demand Note:
Series C, 4.35%, 1/1/16* .................................... 1,000,000 A-1 1,000,000
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

<TABLE>
<CAPTION>
Principal Credit
Amount($) Rating (b) Value($)
<S> <C> <C> <C>

Series D, 4.35%, 1/1/16* .................................... 1,300,000 A-1 1,300,000
Dade County, FL, Water and Sewer System Revenue, Series 1994, Weekly
Demand Note, 4.35%, 10/5/22* (c) .................................... 3,200,000 A-1+ 3,200,000
Orlando, FL, Waste Water System Revenues, 1990 Series A, Tax Exempt
Commercial Paper, 3.85%, 12/14/95 ................................... 2,000,000 A-1+ 2,000,000
Putnam County, FL, Pollution Control Revenue, Seminole Electric
Cooperative Finance Corp., 1984 Series H-1, Weekly Demand Note,
3.6%, 3/15/14* ...................................................... 4,350,000 A-1+ 4,350,000

GEORGIA
Gordon County, GA, Development Authority Revenue, Sara Lee Corp.,
Series 1989, Weekly Demand Note, 4.3%, 3/1/02* ...................... 1,400,000 A-1+ 1,400,000

ILLINOIS
Illinois Development Finance Authority, Deerfield Marriott, Series 1984,
Weekly Demand Note, 4.4%, 11/1/14* .................................. 1,600,000 P-1 1,600,000
Illinois Health Facilities Authority, Rush Presbyterian, St. Luke's Hospital,
1989 Series A, Tax Exempt Commercial Paper, 3.85%, 11/10/95 ......... 1,100,000 A-1+ 1,100,000

INDIANA
City of Sullivan, IN, National Rural Utilities Cooperative Finance Corp.,
Hoosier Energy Rural Electric, Commercial Paper, 3.8%, 11/2/95 ...... 3,000,000 A-1+ 3,000,000

IOWA
Iowa School Corporation Warrant Certificates, Iowa School Cash
Anticipation Program, Capital Guaranty Insured, 4.75%, 6/28/96 ...... 1,500,000 SP-1+ 1,509,618
West Des Moines, IA, Commercial Development Revenue, Greyhound
Lines, Weekly Demand Note, 4.4%, 12/1/14* ........................... 6,400,000 A-1+ 6,400,000

KENTUCKY
Kentucky Development Finance Authority, Healthcare System,
Appalachian Regional Health Care, Series 1991, Weekly Demand
Note, 4.45%, 9/1/06* ................................................ 7,300,000 MIG1 7,300,000

LOUISIANA
Louisiana Recovery District, Sales Tax Revenue Bonds, Series 1988,
Daily Demand Notes, 4.75%, 7/1/98* (c) .............................. 300,000 A-1+ 300,000
Louisiana Recovery District, Sales Tax Revenue Bonds, Series 1988, Daily
Demand Notes, 4.75%, 7/1/97* (c) .................................... 400,000 A-1+ 400,000

MAINE
Maine Tax Anticipation Note, Series 1994, 4.5%, 6/28/96 ..................... 1,000,000 SP-1+ 1,005,357

MARYLAND
Anne Arundel County, MD, Maryland Port Facilities, Baltimore
Gas and Electric, Tax Exempt Commercial Paper, 3.8%, 12/8/95 ........ 1,000,000 MIG1 1,000,000

MINNESOTA
Cottage Grove, MN, Minnesota Mining and Manufacturing, Series 1982,
Weekly Demand Note, 4.32%, 8/1/12* .................................. 300,000 A-1+ 300,000

MISSOURI
Missouri State Environmental Improvement and Energy Resource
Authority, Union Electric Company, 1984 Series A, Optional
Put, 4%, 6/1/14 ..................................................... 2,000,000 A-1+ 2,000,000

</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

AARP HIGH QUALITY TAX FREE
MONEY FUND

<TABLE>
<CAPTION>
Principal Credit
Amount($) Rating (b) Value($)
<S> <C> <C> <C>
NEW HAMPSHIRE
New Hampshire Business Finance Authority, Connecticut Light & Power,
Weekly Demand Note, 4.4%, 12/1/22* .................................. 1,700,000 A-1+ 1,700,000

NEW YORK
New York City, NY, Revenue Anticipation Note, 4.5%, 4/11/96 ................. 2,000,000 MIG1 2,006,601

OREGON
Port of Portland, OR, Pollution Control Revenue, Daily Demand Note,
3.85%, 12/1/09* ..................................................... 1,400,000 P-1 1,400,000

PENNSYLVANIA
Allegheny County, PA, General Obligation, Tender Option Bond, Weekly
Coupon Reset, Series C38, 3.65%, 9/1/04* (c) ........................ 1,000,000 MIG1 1,000,000
Emmaus, PA, General Authority, Local Government Revenue Bond Pool
Program, Weekly Demand Note:
1989 Series E-8, 4.45%, 3/1/24* ............................. 1,200,000 A-1+ 1,200,000
1989 Series E, 4.45%, 3/1/24* ............................... 1,800,000 A-1 1,800,000
1989 Series G, 4.45%, 3/1/24* ............................... 1,000,000 A-1+ 1,000,000
Series E6, 4.45%, 3/1/24* ................................... 2,000,000 A-1+ 2,000,000
Temple University, PA, Higher Education, University Funding Obligation,
5%, 5/22/96 ......................................................... 2,000,000 SP-1+ 2,008,578

TENNESSEE
Chattanooga-Hamilton County Hospital Authority, TN, Erlander Medical
Center, Daily Demand Note, 4.95%, 10/1/17* .......................... 500,000 A-1 500,000
Franklin, TN, Industrial Development Revenue, Franklin Oaks Apartments,
Weekly Demand Note, 4.1%, 12/1/07* .................................. 5,000,000 MIG1 5,000,000

TEXAS
Angelina & Neches River Authority of Texas, IDC, Solid Waste Disposal,
1984 Series D, Daily Demand Note, 4.85%, 5/1/14* .................... 1,400,000 MIG1 1,400,000
Grapevine, TX, Industrial Development Corporation, American Airlines,
Series B4, Daily Demand Note, 4.75%, 12/1/24* ....................... 500,000 P-1 500,000
Lone Star, TX, Airport Improvement Authority, 1995 Series A-3, Daily
Demand Note, 4.75%, 12/1/14* ........................................ 2,700,000 MIG1 2,700,000
North Central Texas Health Facilities Development Corp., Presbyterian
Medical Center, 1995 Series D, Daily Demand Note,
4.75%, 12/1/15* (c) ................................................. 1,500,000 A-1 1,500,000
North Central Texas Health Facilities Development, Methodist Hospitals
of Dallas, 1991 Series A, Tax Exempt Commercial Paper,
3.8%, 12/12/95 ...................................................... 1,100,000 A-1 1,100,000
Port Development Corp., TX, Marine Terminal Refunding Revenue, Stolt
Terminals, Series 1989, Daily Demand Note, 4.85%, 1/15/14* .......... 2,500,000 A-1+ 2,500,000
State of Texas, Tax and Revenue Anticipation Notes, 4.75%, 8/30/96 .......... 2,800,000 SP-1+ 2,818,364
Texas State Water Development Board, Daily Demand Note,
4.95%, 3/1/15* ...................................................... 500,000 A-1+ 500,000

UTAH
Emery County, UT, Pollution Control Revenue, Pacificorp Project, Series
1994, Daily Demand Note, 4.45%, 11/1/24* (c) ........................ 700,000 A-1+ 700,000

</TABLE>

The accompanying notes are an integral part of the financial statements.

38
<PAGE>

<TABLE>
<CAPTION>
Principal Credit
Amount($) Rating (b) Value($)
<S> <C> <C> <C>
VERMONT
State of Vermont, General Obligation, Series F, Tax Exempt Commercial
Paper, 3.75%, 12/13/95 .............................................. 750,000 A-1+ 750,000

VIRGINIA
Henrico County, VA, Industrial Development Authority Revenue,
Health Facility Hermitage Project, Daily Demand Note,
4.8%, 5/1/24* ....................................................... 2,200,000 MIG1 2,200,000

WASHINGTON
Seattle, WA, Municipal Light & Power, Series 1993, Weekly Demand
Note, 4.25%, 11/1/18* ............................................... 1,900,000 A-1+ 1,900,000
Washington General Obligation, Various Purpose, Series B-2, Topstar
Custodial Receipts, Weekly Demand Note, 4.5%, 8/1/02* ............... 2,100,000 AA 2,100,000
Washington Public Power Supply Authority, Projects #1 & #3, Series 1993,
Weekly Demand Note, 4.3%, 7/1/18* ................................... 1,995,000 A-1+ 1,995,000

WYOMING
Sweetwater County, WY, Pollution Control Revenue Refunding, Pacificorp
Project, 1990 Series A, Weekly Demand Note, 4.35%, 7/1/15* .......... 2,000,000 MIG1 2,000,000
-----------

Total Municipal Investments (Cost $118,781,440) ............................. 118,781,440
-----------

SUMMARY % OF NET ASSETS

Total Investment Portfolio (Cost $118,781,440) (a) ........................... 99.2 118,781,440
Other Assets and Liabilities, Net ............................................ 0.8 964,531
----- -----------
Net Assets ................................................................... 100.0 119,745,971
===== ===========

* Floating rate demand notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon-equivalent of the
U.S. Treasury bill rate. Variable rate demand notes are securities whose
interest rates are reset periodically at levels that are generally
comparable to tax-exempt commercial paper. These securities are payable on
demand within seven calendar days and normally incorporate an irrevocable
letter of credit or line of credit from a major bank. Since these securities
are payable on demand, they are valued at 100% of their principal.

(a) At September 30, 1995, the net unrealized depreciation on investments based
on cost for federal income tax purposes of $118,990,915 was as follows:

Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value .............................................................. $ (209,475)
===========
(b) (Unaudited) All of the securities held have been determined to be of
appropriate credit quality as required by the Fund's investment objectives.
Credit ratings shown are either Standard & Poor's Ratings Group, Moody's
Investors Service, Inc. or Fitch Investors Service, Inc. Unrated securities
(NR) have been determined to be of comparable quality to rated eligible
securities.

</TABLE>
- --------------------------------------------------------------------------------
At September 30, 1995, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $1,221,584 of which $618,345
expires September 30, 1996, $170,432 expires September 30, 1997, $19,559
expires September 30, 1999, $323,801 expires September 30, 2000, $401
expires September 30, 2001, $89,046 expires September 30, 2003. In addition,
from November 1, 1994 through September 30, 1995, the Fund incurred
approximately $5,140 of net realized capital losses which the Fund intends
to elect to defer and treat as arising in the fiscal year ended September
30, 1996.

- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements.

39
<PAGE>
AARP GNMA AND U.S.
TREASURY FUND

LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1995

Principal Market
Amount ($) Value ($)
<S> <C>
REPURCHASE AGREEMENTS 2.7%

50,000,000 Repurchase Agreement with First National Bank of Chicago dated 9/29/95
at 6.15% to be repurchased at $50,025,625 on 10/2/95, collateralized
by a $52,190,000 U.S. Treasury Bill, 2/29/96 ................................ 50,000,000

90,947,000 Repurchase Agreement with State Street Bank and Trust Company dated
9/29/95 at 6.1% to be repurchased at $90,994,368 on 10/2/95, collateralized
by a $93,405,000 U.S. Treasury Note, 4.375%, 8/15/96 ........................ 90,947,000
-------------
Total Repurchase Agreements (Cost $140,947,000) ............................. 140,947,000
-------------
U.S. GOVERNMENT AND AGENCIES 19.7%

400,000,000 U.S. Treasury Note, 6.875%, 10/31/96 .......................................... 404,500,000
150,000,000 U.S. Treasury Note, 7.25%, 11/30/96 ........................................... 152,343,000
300,000,000 U.S. Treasury Note, 6.625%, 03/31/97 .......................................... 303,468,000
175,000,000 U.S. Treasury Note, 5.5%, 07/31/97 ............................................ 173,960,500
-------------
Total U.S. Government and Agencies (Cost $1,029,803,232) ...................... 1,034,271,500
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 76.9%

651,569,666 7.00% with various maturities to 4/15/25 ...................................... 644,239,507
794,934,113 7.50% with various maturities to 12/15/99 ..................................... 802,872,359
844,402,076 8.00% with various maturities to 2/15/25 ...................................... 860,520,298
558,231,164 8.50% with various maturities to 11/15/24 ..................................... 581,682,509
330,368,607 9.00% with various maturities to 11/15/21 ..................................... 348,491,976
391,867,716 9.50%,with various maturities to 9/15/24 ...................................... 419,822,174
293,291,996 10.00% with various maturities to 3/15/25 ..................................... 320,803,125
268,591 10.25% with a maturity of 12/15/98 ............................................ 280,927
26,067,132 10.50% with various maturities to 1/20/21 ..................................... 28,579,660
5,532,665 11.50% with various maturities to 2/15/16 ..................................... 6,265,743
10,520,275 12.00% with various maturities to 9/15/15 ..................................... 11,848,109
7,903,944 12.50% with various maturities to 8/15/15 ..................................... 8,935,538
1,997,078 13.00% with various maturities to 11/15/15 .................................... 2,233,603
1,091,591 13.50% with various maturities to 12/15/14 .................................... 1,231,445
342,397 14.00% with various maturities to 11/15/14 .................................... 385,837
96,793 14.50% with a maturity of 10/15/14 ............................................ 109,618
281,272 15.00% with various maturities to 10/15/12 .................................... 320,824
329,724 16.00% with various maturities to 2/15/12 ..................................... 377,327
Total Government National Mortgage Association -------------
(Cost $ 3,928,812,385) ...................................................... 4,039,000,579
-------------
SUMMARY % OF NET ASSETS

Total Investment Portfolio (Cost $5,099,562,617)(a) ................ 99.3 5,214,219,079
Other Assets and Liabilities, Net .................................. 0.7 37,831,395
----- -------------
Net Assets ......................................................... 100.0 5,252,050,474
===== =============
</TABLE>

The accompanying notes are an integral part of the financial statements.

40
<PAGE>

* Effective maturities will be shorter due to amortization and prepayments.

(a) At September 30, 1995, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $5,099,562,617 was as follows:

<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all investments in which there
is an excess of value over tax cost ............................................ $115,751,462

Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value ............................................ (1,095,000)
------------
Net unrealized appreciation..................................................... $114,656,462
============
</TABLE>

- --------------------------------------------------------------------------------
Purchases and sales of investment securities, all of which were U.S.
Government obligations and U.S. Government Agencies (excluding short-term
investments), for the year ended September 30, 1995, aggregated
$4,511,389,063 and $2,955,713,833, respectively.
- --------------------------------------------------------------------------------
At September 30, 1995, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $348,540,975 all of which
expires September 30, 2003. In addition, from November 1, 1994 through
September 30, 1995, the Fund incurred approximately $10,756,284 of net
realized capital losses which the Fund intends to elect to defer and treat
as arising in the fiscal year ended September 30, 1996.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements.

41
<PAGE>
AARP HIGH QUALITY BOND
FUND

LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1995

Principal Market
Amount ($) Value ($)
<S> <C>

COMMERCIAL PAPER 11.0%

26,200,000 Associates Corp. of North America, 6.4%, 10/2/95 ............................. 26,200,000
26,200,000 Household Finance Corp., 6.4%, 10/2/95 ....................................... 26,200,000
6,349,000 Prudential Funding Corp., 6.25%, 10/2/95 ..................................... 6,349,000
-----------

Total Commercial Paper (Cost $58,749,000) .................................... 58,749,000
-----------

U.S. GOVERNMENT & AGENCIES 23.7%

22,000,000 U.S. Treasury Note, 7.5%, 12/31/96 ........................................... 22,440,000
25,000,000 U.S. Treasury Note, 5.5%, 7/31/97 ............................................ 24,851,500
22,500,000 U.S. Treasury Note, 5.5%, 9/30/97 ............................................ 22,362,975
20,000,000 U.S. Treasury Note, 5.125%, 11/30/98 ......................................... 19,528,200
26,500,000 U.S. Treasury Note, 6.375%, 8/15/02 .......................................... 26,893,260
10,500,000 U.S. Treasury Note, 6.25%, 2/15/03 ........................................... 10,559,010
-----------
Total U.S. Government & Agencies (Cost $127,011,250) ......................... 126,634,945
-----------

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 4.6%

23,783,024 8.5% with various maturities to 6/15/25 (Cost $24,686,035) ................... 24,778,819
-----------

U.S. GOVERNMENT AGENCY PASS-THRUS* 36.9%

25,490,584 Federal Home Loan Mortgage Corp., 7%, 6/1/25 ................................. 25,155,893
24,424,107 Federal Home Loan Mortgage Corp., 7%, 7/1/24 ................................. 24,103,418
20,588,785 Federal Home Loan Mortgage Corp., 8%, 6/1/25 ................................. 21,064,798
28,912,000 Federal Home Loan Mortgage Corp., 8%, 7/1/25 ................................. 29,580,445
24,446,860 Federal National Mortgage Association, 7%, 1/1/24 ............................ 24,110,716
20,148,296 Federal National Mortgage Association, 6.5%, 2/1/24 .......................... 19,430,412
29,587,134 Federal National Mortgage Association, 7%, 6/1/24 ............................ 29,180,311
11,880,000 Federal National Mortgage Association, 7.5%, 6/1/25 .......................... 11,954,250
11,853,638 Federal National Mortgage Association, 8.5%, 11/1/09 ......................... 12,290,682
-----------
Total U.S. Government Agency Pass-Thrus (Cost $195,471,744) 196,870,925
-----------

FOREIGN BONDS - U.S.$ DENOMINATED 2.3%

13,000,000 ABN-AMRO Bank NV, subordinated note, 7.13%, 10/15/2093
(Cost $13,174,980) ......................................................... 11,991,460
-----------

ASSET BACKED 0.9%

Manufactured Housing
4,500,000 Merrill Lynch Mortgage Investors Inc., Series 1991-D, 9.85%, 7/15/11
(Cost $4,459,219) ......................................................... 4,906,395
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

42
<PAGE>
<TABLE>
<CAPTION>

Principal Market
Amount ($) Value ($)
<S> <C>

CORPORATE BONDS 19.8%

Consumer Discretionary 2.9%
15,000,000 May Department Stores, 7.6%, 6/1/25 .......................................... 15,325,050
-----------
Consumer Staples 3.2%
15,000,000 Coca Cola Enterprises, Inc., 8.5%, 2/1/22 .................................... 17,090,550
-----------
Financial 3.1%
1,500,000 American Express Credit Corp., 11.625%, 12/12/00 ............................. 1,674,375
15,000,000 Dresdner Bank, subordinate note, 6.625%, 9/15/05 ............................. 14,924,100
-----------
16,598,475
Manufacturing 2.4% -----------
10,000,000 ARCO Chemical Co., 9.8%, 2/1/20 .............................................. 12,761,900
-----------
Energy 6.3%
15,000,000 Atlantic Richfield Co., 9.125%, 8/1/31 ....................................... 18,293,100
15,000,000 Norsk Hydro AS, 7.75%, 6/15/23 ............................................... 15,459,600
-----------
33,752,700
-----------
Utilities 1.9%
10,000,000 Central Power & Light Co., 1st mortgage debenture, 6.625%, 7/1/05 ............ 9,920,700
-----------
Total Corporate Bonds (Cost $102,554,310) .................................... 105,449,375
-----------

SUMMARY % OF NET ASSETS

Total Investment Portfolio (Cost $526,106,538) (a) ............. 99.2 529,380,919
Other Assets and Liabilities, Net............................... 0.8 4,041,378
----- -----------
Net Assets...................................................... 100.0 533,422,297
===== ===========

* Effective maturities will be shorter due to amortization and prepayments.

(a) At September 30, 1995, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $526,106,538 was as follows:

Aggregate gross unrealized appreciation for all investments in which there
is an excess of value over tax cost...................................................... $ 5,533,774

Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value...................................................... (2,259,393)
-----------
Net unrealized appreciation.............................................................. $ 3,274,381
===========

</TABLE>
- --------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1995 was $270,414,934 and $282,116,367,
respectively.
- --------------------------------------------------------------------------------
For the year ended September 30, 1995, purchases and sales of investment
securities (excluding short-term investments) aggregated $104,667,360 and
$189,520,281, respectively. Purchases and sales of U.S. Government
obligations and U.S. Government Agencies aggregated $823,851,340 and
$789,159,489, respectively.
- --------------------------------------------------------------------------------
At September 30, 1995, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $8,691,826 which expires
September 30, 2003. In addition, from November 1, 1994 through September
30, 1995, the Fund incurred approximately $1,533,583 of net realized
capital losses which the Fund intends to elect to defer and treat as
arising in the fiscal year ended September 30, 1996.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements.

43
<PAGE>
AARP INSURED TAX FREE
GENERAL BOND FUND

LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
SHORT-TERM MUNICIPAL INVESTMENTS (UNDER 1 YEAR) - 3.9%

CALIFORNIA
California, Revenue Anticipation Warrants, Series C, 5.75%, 4/25/96........... 15,000,000 MIG-1 15,153,300
California, Revenue Anticipation Warrants, Series D, 6.5%, 4/25/96............ 5,000,000 SP-2 5,055,600

DISTRICT OF COLUMBIA
District of Columbia, General Obligation, Daily Demand Note:
Refunding Bonds, Series A2, 4.65%, 10/1/07*................................ 3,000,000 AA 3,000,000
Refunding Bonds, Series A3, 4.65%, 10/1/07*................................ 2,900,000 AA 2,900,000
Refunding Bonds, Series A5, 4.65%, 10/1/07*................................ 1,500,000 AA 1,500,000

FLORIDA
Halifax Hospital Medical Center, FL, Hospital Revenue, Periodic Auction
Reset, Series A, 3.85%, 10/1/19* (c)....................................... 24,000,000 AAA 24,000,000
INDIANA
Jasper County, IN, Pollution Control Revenue, Northern Indiana Public
Service Project, Series 1994-C, Daily Demand Bond, 4.5%, 4/1/19*........... 1,600,000 MIG-1 1,600,000

LOUISIANA
Louisiana Recovery District, Sales Tax Revenue Bonds, Daily Demand Notes:
Series 1988, 4.75%, 7/1/97*................................................ 4,300,000 MIG-1 4,300,000
Series 1988, 4.75%, 7/1/98* (c)............................................ 500,000 MIG-1 500,000

MICHIGAN
Regents of the University of Michigan Hospital Revenue Bonds,
Series 1995-A, Daily Demand Bond, 4.5%, 12/1/27*........................... 1,400,000 MIG-1 1,400,000
University of Michigan, Hospital Revenue, Series A, Daily Demand Bond,
4.5%, 12/1/19*............................................................. 2,300,000 MIG-1 2,300,000

TEXAS
Harris County, TX, Health Facilities Development Corporation, St. Luke's
Episcopal Hospital, Series 1985-B, Daily Demand Note,
4.85%, 2/15/16*............................................................ 1,300,000 A-1+ 1,300,000
State of Texas, Tax and Revenue Anticipation Notes, 4.75%, 8/30/96............ 8,000,000 SP-1+ 8,058,560
----------
Total Short-Term Municipal Investments (Cost $70,947,025)..................... 71,067,460
----------

LONGER-TERM MUNICIPAL INVESTMENTS (Over 1 year) - 94.8%

ALABAMA
Birmingham, AL, Special Care Facilities, Baptist Medical Center, Series A,
5.5%, 8/15/13 (c).......................................................... 2,800,000 AAA 2,698,024
Montgomery, AL, Special Care Facilities, Baptist Medical Center, Series A,
5.75%, 1/1/12 (c).......................................................... 2,000,000 AAA 1,978,980

ALASKA
Alaska State Housing Finance Corporation, Veterans Mortgage Project,
Series F, 8.1%, 9/1/20..................................................... 6,770,000 AAA 7,224,944
Anchorage, AK, Certificate of Participation, Series A,
7.8%, 2/15/06 (c).......................................................... 10,000,000 AAA 10,359,800

</TABLE>

The accompanying notes are an integral part of the financial statements.

44
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
North Slope Borough, AK, General Obligation:
Series A, Capital Appreciation, Zero Coupon, 6/30/06 (c).................... 4,000,000 AAA 2,236,560
Series B, Capital Appreciation, Zero Coupon, 1/1/03 (c)..................... 16,000,000 AAA 11,055,680
Series B, Capital Appreciation, Zero Coupon, 6/30/04(c)..................... 15,500,000 AAA 9,780,810
Series B, Capital Appreciation, Zero Coupon, 6/30/05 (c).................... 25,600,000 AAA 15,181,312

ARIZONA
Arizona Municipal Finance Program, Certificate of Participation,
Series -25, 7.875%, 8/1/14 (c).............................................. 3,500,000 AAA 4,471,950
Maricopa County, AZ, School District -28, Kyrene Elementary, Series B,
Zero Coupon, 1/1/04 (c)..................................................... 6,000,000 AAA 3,955,800
Maricopa County, AZ, School District -6, Washington Elementary, Series B,
4.1%, 7/1/13 (c)............................................................ 2,950,000 AAA 2,342,595
Maricopa County, AZ, Unified School District -41, Gilbert School,
Capital Appreciation, Zero Coupon, 1/1/05 (c)............................... 5,280,000 AAA 3,280,094
Maricopa County, AZ, Unified School District -68, Alhambra Elementary,
Zero Coupon:
7/1/03 (c)............................................................... 2,860,000 AAA 1,948,461
7/1/04 (c)............................................................... 2,860,000 AAA 1,838,608
7/1/05 (c)............................................................... 2,850,000 AAA 1,725,561
Scottsdale, AZ, Industrial Development Authority, Scottsdale Memorial
Hospital, 8.5%, 9/1/17 (c).................................................. 1,050,000 AAA 1,151,451

CALIFORNIA
Alameda County, CA, Certificate of Participation, Santa Rita Jail Project,
5.375%, 6/1/09 (c).......................................................... 10,415,000 AAA 10,250,755
Banning, CA, Wastewater Revenue, Certificate of Participation,
8%, 1/1/19 (c).............................................................. 2,040,000 AAA 2,608,752
California Sate Department of Water Resources, Series M, 4.9%, 12/1/09 (c)..... 4,485,000 AAA 4,167,866
California State Public Works Board, Lease Revenue, Department of
Corrections:
Del Norte/Imperial, Series C, 5%, 12/1/07 (c)............................ 6,000,000 AAA 5,844,840
Series A, 5.25%, 12/1/07 (c)............................................. 9,000,000 AAA 8,983,170
Series A, 5.25%, 12/1/08 (c)............................................. 3,000,000 AAA 2,968,860
California State Public Works Board, Lease Revenue, Secretary of State,
Series A, 6.3%, 12/1/06 (c)................................................. 8,095,000 AAA 8,935,585
California Statewide Communities Development Corporation, Certificate
of Participation, Children's Hospital, 5%, 6/1/06 (c)....................... 2,035,000 AAA 1,995,277
Escondido, CA, Joint Powers Financing Authority, Lease Revenue, Capital
Appreciation, Center for the Arts Projects, Zero Coupon, 9/1/05 (c)......... 3,255,000 AAA 1,879,860
Los Angeles County, CA;
Capital Asset Leasing, 6%, 12/1/06 (c)...................................... 9,000,000 AAA 9,706,500
Convention & Exhibition Center Authority, Certificate of Participation:
Zero Coupon, 8/15/02 (c)................................................. 5,000,000 AAA 3,526,750
Zero Coupon, 8/15/03 (c)................................................. 6,270,000 AAA 4,152,308
Public Works Finance Authority, Lease Revenue, Multiple Projects IV,
4.75%, 12/1/10 (c)....................................................... 11,140,000 AAA 9,907,470
Madera County, CA, Certificates of Participation, Valley Children's Hospital,
Series 1995, 6.5%, 3/15/10.................................................. 2,840,000 AAA 3,058,708
Northern California Transmission Revenue, Ore Transmission Project,
Series A, 5.1%, 5/1/06 (c).................................................. 5,000,000 AAA 5,016,000

</TABLE>

The accompanying notes are an integral part of the financial statements.
45

<PAGE>

AARP INSURED TAX FREE
GENERAL BOND FUND

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
Norwalk, CA, Redevelopment Agency, 9.1%, 12/1/15............................... 7,000,000 NR 7,203,280
Oakland, CA, Redevelopment Agency, Tax Allocation Central District,
6%, 2/1/07 (c).............................................................. 2,000,000 AAA 2,148,020
Palomar Pomerado, CA, Health Systems, Series B, Zero Coupon 11/1/02 (c)........ 3,080,000 AAA 2,149,316
Riverside, CA, Transportation Commission, Sales Tax Revenue, Series A:
5.7%, 6/1/06 (c)............................................................ 5,400,000 AAA 5,652,342
5.75%, 6/1/07 (c)........................................................... 3,000,000 AAA 3,132,030
San Diego County, CA, Regional Transportation, Community Sales Tax
Revenue, Series A, 5.25%, 4/1/07 (c)........................................ 2,500,000 AAA 2,495,700
San Diego County, CA, Water Authority, Certificate of Participation:
5.632%, 4/25/07 (c)......................................................... 6,300,000 AAA 6,412,266
5.681%, 4/22/09 (c)......................................................... 4,500,000 AAA 4,525,200
San Francisco, CA, Bay Area Rapid Transit District, Sales Tax Revenue
Refunding, 6.75%, 7/1/10 (c)................................................ 2,000,000 AAA 2,256,700
San Joaquin, CA, Certificate of Participation, County Public Facilities
Project, 5.5%, 11/15/13 (c)................................................. 2,000,000 AAA 1,905,060
Sweetwater, CA, Water Revenue, 5.25%, 4/1/10 (c)............................... 13,240,000 AAA 12,809,170
Three Valleys, CA, Municipal Water District, Certificates of Participation,
5%, 11/1/14 (c)............................................................. 3,000,000 AAA 2,689,860

DISTRICT OF COLUMBIA
District of Columbia, Georgetown University, Series B, 7.1%, 4/1/12............ 3,000,000 A 3,253,740
District of Columbia, General Obligation:
Refunding Revenue, 5.875%, 6/1/05 (c)....................................... 4,750,000 AAA 4,961,518
Series A, Prerefunded 6/1/99 at 102, 7.5%, 6/1/09 (c)....................... 5,000,000 AAA 5,614,150
Series A1, 6.5%, 6/1/10 (c)................................................. 2,270,000 AAA 2,462,814
Series B, Zero Coupon, 6/1/00 (c)........................................... 3,500,000 AAA 2,785,090
Series B, 6.125%, 6/1/03 (c)................................................ 4,000,000 AAA 4,259,840
Series B, 5.4%, 6/1/06 (c).................................................. 18,905,000 AAA 18,842,803
Series B, 5.5%, 6/1/07 (c).................................................. 25,000,000 AAA 24,870,250
Series B, 5.5%, 6/1/08 (c).................................................. 21,300,000 AAA 20,936,196
Series B, 5.5%, 6/1/09 (c).................................................. 15,150,000 AAA 14,695,652
Series B, 5.5%, 6/1/09 (c).................................................. 2,840,000 AAA 2,754,828
Series B, 5.5%, 6/1/10 (c).................................................. 15,590,000 AAA 14,908,093
Series B, 5.5%, 6/1/12 (c).................................................. 1,050,000 AAA 987,683
Series B-3, 5.4%, 6/1/06 (c)................................................ 10,000,000 AAA 9,967,100

FLORIDA
Florida Department of Natural Resources, Environmental Preservation,
Series A, 4.75%, 7/1/12 (c)................................................. 10,000,000 AAA 8,863,600
Florida Municipal Power Agency, Stanton II Project, Refunding Revenue,
4.5%, 10/1/16 (c)........................................................... 4,400,000 AAA 3,691,644
Orange County, FL, Health Facilities Authority Refunding Program,
Series A, 7.875%, 12/1/25 (c)............................................... 16,925,000 AAA 18,227,717
Orlando, FL, Utility Commission, Water & Electric Refunding Revenue,
5.9%, 10/1/08............................................................... 4,000,000 AA 4,242,800
Sarasota County, FL, School Board Finance Corporation, Lease Revenue:
5%, 7/1/10 (c).............................................................. 3,800,000 AAA 3,563,678
Refunding Revenue, 5%, 7/1/09 (c)........................................... 5,595,000 AAA 5,342,554

</TABLE>

The accompanying notes are an integral part of the financial statements.

46
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
GEORGIA
Cobb County, GA, Kennestone Hospital Authority, Series A,
5.625%, 4/1/11 (c)..................................................... 5,305,000 AAA 5,302,188
Macon-Bibb County, GA, Hospital Authority, Medical Center of Central
Georgia, Series C, 5.25%, 8/1/11 (c)................................... 10,225,000 AAA 9,717,533
Municipal Electric Authority of Georgia:
5th Crossover, Project #1, 6.4%, 1/1/13 (c)............................ 3,500,000 AAA 3,734,535
Power Revenue, Series Z, 5.5%, 1/1/12 (c).............................. 1,600,000 AAA 1,562,880

ILLINOIS
Central Lake County, IL, Joint Action Water Agency Refunding Revenue:
Zero Coupon, 5/1/02 (c)................................................ 2,245,000 AAA 1,614,133
5.3%, 5/1/06 (c)....................................................... 2,120,000 AAA 2,138,698
5.4%, 5/1/07 (c)....................................................... 2,280,000 AAA 2,293,520
Chicago O'Hare International Airport, IL, Revenue Refunding, Series C:
5%, 1/1/10 (c)......................................................... 15,410,000 AAA 14,308,493
5%, 1/1/11 (c)......................................................... 16,500,000 AAA 15,189,405
5%, 1/1/18 (c)......................................................... 4,400,000 AAA 3,862,936
Chicago, IL, School Finance Authority, Series A:
4.8%, 6/1/01 (c)....................................................... 3,255,000 AAA 3,282,928
5%, 6/1/08 (c)......................................................... 5,000,000 AAA 4,751,650
5%, 6/1/09 (c)......................................................... 5,425,000 AAA 5,067,276
Chicago, IL, General Obligation:
Series A, 5.375%, 1/1/13 (c)........................................... 15,410,000 AAA 14,684,035
Series B, 5%, 1/1/08 (c)............................................... 3,485,000 AAA 3,354,870
Series B, 5%, 1/1/10 (c)............................................... 5,200,000 AAA 4,837,924
Series B, 5%, 1/1/11 (c)............................................... 1,620,000 AAA 1,497,528
Series B, 5%, 1/1/12 (c)............................................... 5,000,000 AAA 4,582,150
Series B, 5.125%, 1/1/15 (c)........................................... 9,550,000 AAA 8,673,310
6.25%, 1/1/11 (c)...................................................... 3,000,000 AAA 3,188,370
Chicago, IL, General Obligation Lease, Board of Education, Series A:
6.25%, 1/1/10 (c)...................................................... 6,800,000 AAA 7,249,956
6.25%, 1/1/15 (c)...................................................... 23,000,000 AAA 23,983,710
6%, 1/1/16 (c)......................................................... 11,025,000 AAA 11,185,634
6%, 1/1/20 (c) (d)..................................................... 36,625,000 AAA 36,760,146
Chicago, IL, General Obligation, Emergency Telephone System,
5.55%, 1/1/08 (c)...................................................... 5,820,000 AAA 5,907,358
Chicago, IL, Motor Fuel Tax Revenue, Prerefunded 1/1/01 at 100,
6.5%, 1/1/16 (c)....................................................... 2,000,000 AAA 2,180,280
Chicago, IL, Public Building Commission, Building Revenue, Series A:
5.25%, 12/1/07 (c)..................................................... 3,500,000 AAA 3,493,455
5.25%, 12/1/09 (c)..................................................... 10,420,000 AAA 10,115,111
5.25%, 12/1/11 (c)..................................................... 9,705,000 AAA 9,197,623
Chicago, IL, Public Building Commission, Board of Education, Series A,
Zero Coupon, 1/1/06 (c)................................................ 2,430,000 AAA 1,405,536
Chicago, IL, Wastewater Transmission Revenue:
5.5%, 1/1/09 (c)....................................................... 11,990,000 AAA 11,955,229
5.5%, 1/1/10 (c)....................................................... 7,220,000 AAA 7,100,365
Cook County, IL, General Obligation;
Zero Coupon, 11/1/04 (c)............................................... 3,205,000 AAA 2,001,074

</TABLE>

The accompanying notes are an integral part of the financial statements.

47
<PAGE>

AARP INSURED TAX FREE
GENERAL BOND FUND
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
Series C, 6%, 11/15/07 (c)............................................. 5,000,000 AAA 5,342,150
Decatur, IL, General Obligation, Series 1991, Zero Coupon:
10/1/03 (c)............................................................ 1,455,000 AAA 967,677
10/1/04 (c)............................................................ 1,415,000 AAA 886,512
Decatur, IL, Public Building Commission, General Obligation,
Certificate of Participation:
6.5%, 1/1/03 (c).................................................... 1,725,000 AAA 1,890,548
6.5%, 1/1/06 (c).................................................... 1,500,000 AAA 1,650,810
Illinois, Dedicated Tax Revenue, Civic Center Project:
Series A, 6.5%, 12/15/07............................................... 3,000,000 AAA 3,337,440
Series A, 6.5%, 12/15/08 (c)........................................... 5,255,000 AAA 5,816,339
6.25%, 12/15/11 (c).................................................... 3,000,000 AAA 3,195,720
6.25%, 12/15/20 (c).................................................... 6,975,000 AAA 7,273,600
Illinois Educational Facilities Authority, Loyola University:
Series 1991-A, Zero Coupon, 7/1/04 (c)................................. 2,860,000 AAA 1,815,242
Zero Coupon, 7/1/05 (c)................................................ 4,000,000 AAA 2,387,520
Illinois Health Facilities Authority, Brokaw-Mennonite Healthcare:
6%, 8/15/06 (c)........................................................ 1,380,000 AAA 1,464,829
6%, 8/15/07 (c)........................................................ 1,460,000 AAA 1,539,234
6%, 8/15/08 (c)........................................................ 1,550,000 AAA 1,620,727
6%, 8/15/09 (c)........................................................ 1,640,000 AAA 1,698,548
Illinois Health Facilities Authority:
Children's Memorial Hospital, 6.25%, 8/15/13 (c)....................... 2,000,000 AAA 2,069,760
Felician Healthcare Inc., Series A, 6.25%, 1/1/15 (c).................. 17,000,000 AAA 17,657,390
Memorial Medical Center, 6.75%, 10/1/11 (c)............................ 2,135,000 AAA 2,277,106
Methodist Health Service, Series 1985-G, 8%, 8/1/15 (c)................ 10,110,000 AAA 11,401,957
Sherman Hospital, 6.75%, 8/1/11 (c).................................... 2,700,000 AAA 2,897,235
SSM Healthcare System, Series AA, 6.4%, 6/1/08 (c)..................... 1,350,000 AAA 1,459,701
Joliet, IL, Junior College Assistance Corporation, Lease Revenue, North...
Campus Extension Center, 6.7%, 9/1/12 (c).............................. 2,500,000 AAA 2,763,225
Kendall, Kane and Will Counties, IL, Community Unit School
District #308, Oswego, Zero Coupon:
3/1/02 (c).......................................................... 1,055,000 AAA 764,886
3/1/05 (c).......................................................... 1,540,000 AAA 935,565
3/1/06 (c).......................................................... 1,595,000 AAA 907,922
Metropolitan Pier & Exposition Authority, IL, McCormick Place
Expansion Project, Zero Coupon:
12/15/03 (c)........................................................ 3,200,000 AAA 2,106,080
6/15/04 (c)........................................................ 10,300,000 AAA 6,552,551
Northern Cook County, IL, Solid Waste Agency Contract Revenue,
6.5%, 5/1/09 (c)....................................................... 6,000,000 AAA 6,372,840
Northwest Suburban Municipal Joint Action Water Agency, IL,
Supply System Revenue, 6.45%, 5/1/07 (c)............................... 2,575,000 AAA 2,819,471
Rosemont, IL, Tax Increment, Series C, Zero Coupon:
12/1/05 (c)............................................................ 4,455,000 AAA 2,601,185
12/1/07 (c)............................................................ 2,655,000 AAA 1,355,484
State University Retirement System, IL, Special Revenue, Zero
Coupon, 10/1/03 (c).................................................... 2,750,000 AAA 1,828,943

</TABLE>

The accompanying notes are an integral part of the financial statements.

48
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
University of Illinois, Board of Trustees, Series 1991, Zero Coupon:
4/1/03 (c)............................................................. 3,890,000 AAA 2,653,875
4/1/05 (c)............................................................. 3,830,000 AAA 2,316,499
Will County, IL, Community Unit School District #201-U, Crete-Monee,
Capital Appreciation, Zero Coupon:
12/15/00 (c)........................................................ 1,325,000 AAA 1,030,598
12/15/01 (c)........................................................ 1,730,000 AAA 1,275,321

INDIANA
Fort Wayne, IN, Parkview Memorial Hospital, Series A, 6.5%,
11/15/12 (c)........................................................... 1,400,000 AAA 1,444,338
Indiana Health Facilities Finance Authority, Hospital Revenue:
Ancilla Systems Inc., Series A, 6%, 7/1/18 (c)......................... 27,635,000 AAA 27,733,933
Community Hospital Project, 6.4%, 5/1/12 (c)........................... 5,000,000 AAA 5,173,000
Indiana Municipal Power Agency, Power Supply System, Series B,
6%, 1/1/12 (c)......................................................... 2,000,000 AAA 2,078,980
Indiana University, Student Fee Revenue:
Series J, 5%, 8/1/18 (c)............................................... 4,200,000 AAA 3,671,598
Series H, Zero Coupon, 8/1/06 (c)...................................... 8,500,000 AAA 4,730,760
Series H, Zero Coupon, 8/1/08 (c)...................................... 10,000,000 AAA 4,841,600
Madison County, IN, Community Hospital of Anderson, Prerefunded
1/1/98 at 102, 8%, 1/1/14 (c).......................................... 7,055,000 AAA 7,750,623
Merrillville, IN, Multiple School Building Corporation, First Mortgage,
Zero Coupon, 1/15/11 (c)............................................... 4,000,000 AAA 1,629,080
Porter County, IN, Hospital Authority, Porter Memorial Hospital, Series
1993, 5.25%, 6/1/14 (c)................................................ 8,750,000 AAA 8,045,713

IOWA
Muscatine, IA, Electric Utility, Revenue Refunding, 7.625%, 1/1/04 (c).... 6,600,000 AAA 6,795,360
Polk County, IA, Mercy Hospital, 6.75%, 11/1/05 (c)....................... 5,000,000 AAA 5,507,700

KANSAS
Kansas City, KS, Utility System Revenue:
ETM, Zero Coupon, 9/1/04 **............................................ 3,575,000 AAA 2,296,973
ETM, Zero Coupon, 9/1/05 **............................................ 5,300,000 AAA 3,212,489
ETM, Zero Coupon, 9/1/06 **............................................ 1,875,000 AAA 1,066,856
Zero Coupon, 9/1/04.................................................... 2,640,000 AAA 1,671,305
Zero Coupon, 9/1/05.................................................... 3,950,000 AAA 2,371,146
Zero Coupon, 9/1/06.................................................... 1,375,000 AAA 774,070

LOUISIANA
Louisiana Public Facilities Authority, Prerefunded 2/15/08 at 100,
4.75%, 5/1/16.......................................................... 5,765,000 AAA 5,479,517
New Orleans, LA, General Obligation, Zero Coupon, 9/1/07 (c).............. 10,000,000 AAA 5,218,600

MARYLAND
University of Maryland, Facilities & Tuition Revenue, 4.75%,
10/1/07 (c)............................................................ 14,605,000 AAA 13,960,481

MASSACHUSETTS
Commonwealth of Massachusetts, General Obligation:
Series A, 7%, 3/1/99 (c)............................................... 4,850,000 AAA 5,239,892
Series A, 6%, 7/1/05 (c)............................................... 4,000,000 AAA 4,305,440
Series C, 5%, 8/1/06 (c)............................................... 20,000,000 AAA 19,767,800

</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
AARP INSURED TAX FREE
GENERAL BOND FUND

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
Series D, Prerefunded 10/1/99 at 102, 7%, 10/1/03 (c).................. 7,000,000 AAA 7,792,960
Massachusetts Bay Transportation Authority, General
Transportation System:
Series A, 5.4%, 3/1/07 (c).......................................... 5,000,000 AAA 5,106,700
5.25%, 3/1/06 (c)................................................... 10,000,000 AAA 10,184,300
Massachusetts Housing Finance Agency, Multi-Family Mortgage Purchase
Revenue, 9.25%, 12/1/14 (c)............................................ 2,500,000 AAA 2,594,675
Massachusetts Municipal Wholesale Electric Company, Power Supply
System Revenue, Series A:
5.1%, 7/1/06 (c).................................................... 8,795,000 AAA 8,693,857
5.1%, 7/1/07 (c).................................................... 1,640,000 AAA 1,611,415
5.1%, 7/1/08 (c).................................................... 5,715,000 AAA 5,532,234

MICHIGAN
Brighton, MI, Area School District, Series I, Prerefunded 5/1/05 at
34.134, Zero Coupon, 5/1/20 (c)........................................ 22,000,000 AAA 4,521,880
Detroit, MI, General Obligation, Distributable State Aid Refunding:
5.2%, 5/1/07 (c)....................................................... 3,000,000 AAA 2,953,710
5.25%, 5/1/08 (c)...................................................... 1,500,000 AAA 1,464,840
Kalamazoo, MI, Hospital Finance Authority, Hospital Revenue, Borgess
Medical Center, Series A, Prerefunded 7/1/99 at 100, 6%, 7/1/09 (c).... 8,250,000 AAA 8,722,148
Michigan Hospital Finance Authority, Sisters of Mercy, Series P:
5.1%, 8/15/07 (c)...................................................... 3,000,000 AAA 2,952,570
5.25%, 8/15/08 (c)..................................................... 8,655,000 AAA 8,527,079
Michigan Housing Development Authority, Rental Revenue,
Series B, 5.7%, 4/1/12................................................. 6,275,000 A 6,047,594

MISSISSIPPI
Mississippi Hospital Equipment Facilities Authority, North Mississippi
Health Services, 5.5%, 5/15/09 (c)..................................... 4,350,000 AAA 4,292,276

MISSOURI
Missouri Health & Educational Facilities Authority, SSM Healthcare,
Series 1992-AA:
6.35%, 6/1/08 (c)................................................... 8,125,000 AAA 8,865,025
6.4%, 6/1/09 (c).................................................... 8,640,000 AAA 9,405,590

NEVADA
Clark County, NV, General Obligation, School District, Series B, Zero
Coupon, 3/1/05 (c)..................................................... 8,070,000 AAA 4,934,079

NEW JERSEY
New Jersey Housing and Finance Agency, Home Mortgage Purchase
Revenue, Zero Coupon, 10/1/16 (c)...................................... 5,155,000 AAA 582,979
New Jersey State Transportation Authority, Transportation System,
Series A, 5.25%, 6/15/14 (c)........................................... 20,000,000 AAA 19,103,600

NEW YORK
Metropolitan Transportation Authority, NY, Transit Facilities Revenue,
Series N, 4.9%, 7/1/07 (c)............................................. 8,500,000 AAA 8,277,130
New York City, NY, General Obligation:
Series A, Prerefunded 11/1/97 at 101.50, 8%, 11/1/01................... 760,000 AAA 830,634
Series A, ETM, 8%, 11/1/01 ** ......................................... 740,000 AAA 816,879
Series A, 3%, 8/15/02 (c).............................................. 9,000,000 AAA 8,099,460

</TABLE>

The accompanying notes are an integral part of the financial statements.

50
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
Series D, 6%, 8/1/06 (c)............................................... 140,000 AAA 145,118
Series D, 6%, 8/1/08 (c)............................................... 370,000 AAA 381,056
Series D, 8%, 8/1/05 (c)............................................... 170,000 AAA 186,492
Series D, Prerefunded 8/1/97 at 102, 8%, 8/1/05 (c).................... 830,000 AAA 903,505
Series E, ETM, 7%, 12/1/07 (c) ** ..................................... 1,385,000 AAA 1,486,562
Series E, 7%, 12/1/07 (c) ............................................. 115,000 AAA 123,060
Prerefunded 11/1/97 at 101.50, 8.125%, 11/1/05 (c)..................... 1,400,000 AAA 1,533,588
New York City, NY, General Obligation, Series Fiscal 1992-C:
6.4%, 8/1/04 (c)....................................................... 500,000 AAA 548,475
6.4%, 8/1/05 (c)....................................................... 430,000 AAA 469,066
Prerefunded 8/1/02 at 101.50, 6.4%, 8/1/05 (c)......................... 10,000,000 AAA 11,186,300
New York State Dormitory Authority Revenue, City University:
Series D, 7%, 7/1/09 (c)............................................... 4,000,000 AAA 4,625,800
Series C, 7.5%, 7/1/10 (c)............................................. 5,750,000 AAA 6,907,705
New York State Dormitory Authority Revenue, College and University
Pooled Capital Program, 7.8%, 12/1/05 (c).............................. 10,890,000 AAA 11,855,181
New York State Energy Research and Development Authority, Pollution
Control Revenue, NY Electric and Gas Corporation, 5.9%, 12/1/06 (c).... 5,300,000 AAA 5,645,560
New York State Medical Care Facilities Agency, Mental Health Services,
Series F, 4.8%, 8/15/05 (c)............................................ 10,000,000 AAA 9,716,000
New York State Urban Development Authority, Correctional Facilities:
Series A, 5%, 1/1/07 (c)............................................... 4,315,000 AAA 4,252,605
Series A, 6.5%, 1/1/11 (c)............................................. 4,500,000 AAA 4,887,090
Suffolk County, NY, Industrial Development Agency, Southwest Sewer
System, 6%, 2/1/07 (c)................................................. 8,000,000 AAA 8,549,360

NORTH CAROLINA
North Carolina Eastern Municipal Power Agency, Power System Revenue,
Series B, 6%, 1/1/18................................................... 8,775,000 AAA 8,958,661
North Carolina Municipal Power Agency, Catawba Electric Revenue:
5.25%, 1/1/08 (c)...................................................... 2,500,000 AAA 2,475,275
6%, 1/1/11 (c)......................................................... 8,235,000 AAA 8,612,163
7.5%, 1/1/17........................................................... 4,520,000 A 4,836,536

NORTH DAKOTA
Bismarck, ND, Hospital Revenue, St. Alexius Medical Center,
Series 1991, Zero Coupon, 5/1/02 (c)................................... 2,850,000 AAA 2,049,122

OHIO
Hamilton County, OH, Electric System Mortgage Revenue, Series B,
Prerefunded 10/15/98 at 102, 8%, 10/15/22 (c).......................... 3,720,000 AAA 4,183,177
Ohio Air Quality Development Authority, Ohio Power Company,
Series B, 7.4%, 8/1/09 (c)............................................. 5,000,000 AAA 5,535,600
Ohio State Building Authority, Worker's Compensation Building,
Series A, 4.9%, 4/1/07 (c)............................................. 3,375,000 AAA 3,288,094

OKLAHOMA
Tulsa, OK, Industrial Development Authority, St. John's Medical Center:
Zero Coupon, 12/1/02 (c)............................................... 3,930,000 AAA 2,730,878
Zero Coupon, 12/1/04 (c)............................................... 5,430,000 AAA 3,351,668

</TABLE>

The accompanying notes are an integral part of the financial statements.

51
<PAGE>

AARP INSURED TAX FREE
GENERAL BOND FUND
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
PENNSYLVANIA
Commonwealth of Pennsylvania, Certificates of Participation, Series A:
5.25%, 7/1/11 (c)...................................................... 9,000,000 AAA 8,536,860
5.4%, 7/1/09........................................................... 4,495,000 AAA 4,442,993
Pennsylvania Industrial Development Authority, Economic
Development Revenue:
5.8%, 1/1/08 (c).................................................... 4,250,000 AAA 4,431,560
5.8%, 7/1/08 (c).................................................... 4,875,000 AAA 5,089,159
5.8%, 1/1/09 (c).................................................... 2,500,000 AAA 2,583,950
Philadelphia, PA, General Obligation, Prerefunded 2/15/96,
8.25%, 2/15/09 (c)..................................................... 1,215,000 AAA 1,258,776
Philadelphia, PA, Water & Wastewater Refunding Revenue:
5.5%, 6/15/07 (c)...................................................... 5,000,000 AAA 5,103,500
5.625%, 6/15/08 (c).................................................... 2,100,000 AAA 2,146,725
5.625%, 6/15/09 (c).................................................... 20,000,000 AAA 20,217,400
5.625%, 6/15/09 (c).................................................... 10,855,000 AAA 10,972,994
Philadelphia, PA, Municipal Authority Revenue, Justice Lease,
Series B, Prerefunded 11/15/01 at 102, 6.9%, 11/15/03 (c).............. 2,000,000 AAA 2,277,940
Westmoreland County, PA, Industrial Development Revenue,
Westmoreland Health System, 5.375%, 7/1/11 (c)......................... 6,750,000 AAA 6,516,383

PUERTO RICO
Commonwealth of Puerto Rico, Highway & Transportation Authority
Revenue, 5.5%, 7/1/09 (c).............................................. 10,940,000 AAA 11,097,317

RHODE ISLAND
Rhode Island Clean Water Protection Agency, Pollution Control Revenue,
Revolving Fund, Series A, 5.4%, 10/1/15 (c)............................ 2,000,000 AAA 1,889,060
Rhode Island Convention Center Authority, Refunding Revenue:
Series 1993 B, 5%, 5/15/10 (c)......................................... 5,000,000 AAA 4,636,750
Series 1993 B, 5.25%, 5/15/15 (c)...................................... 22,000,000 AAA 20,408,960
Rhode Island Depositors Economic Protection Corporation, Special
Obligation, Series B:
5.8%, 8/1/10 (c).................................................... 6,200,000 AAA 6,273,284
5.8%, 8/1/11 (c).................................................... 4,525,000 AAA 4,533,824
5.8%, 8/1/12 (c).................................................... 2,500,000 AAA 2,489,125
5.8%, 8/1/13 (c).................................................... 7,340,000 AAA 7,258,893
Rhode Island Public Building Authority, Public Projects, Series A,
Prerefunded 2/1/98 at 102, 8.2%, 2/1/08 (c)............................ 2,200,000 AAA 2,432,760

SOUTH CAROLINA
Charleston County, SC, Hospital Authority, 5.5%, 10/1/19.................. 2,500,000 AAA 2,336,000
Piedmont Municipal Power Agency, SC, Electric Revenue:
Series A, 6.5%, 1/1/16 (c)............................................. 3,000,000 AAA 3,251,730
Series C, 5.5%, 1/1/12 (c)............................................. 5,000,000 AAA 4,915,200
5.5%, 1/1/08 (c)....................................................... 1,915,000 AAA 1,952,477

SOUTH DAKOTA
South Dakota Building Authority, Certificate of Participation,
Series A, 7.5%, 12/1/16................................................ 4,000,000 A 4,205,120

</TABLE>

The accompanying notes are an integral part of the financial statements.

52
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
TENNESSEE
Knox County, TN, Health & Educational Hospital Facilities Board,
Fort Sanders Alliance:
7.25%, 1/1/09 (c)................................................... 3,150,000 AAA 3,704,463
5.75%, 1/1/11 (c)................................................... 15,405,000 AAA 15,685,679
5.75%, 1/1/12 (c)................................................... 17,880,000 AAA 18,104,752
6.25%, 1/1/13 (c)................................................... 4,000,000 AAA 4,248,200

TEXAS
Dallas, TX, Housing Finance Corporation, Single Family Mortgage Revenue,
Zero Coupon, 10/1/16 (c)............................................... 7,450,000 AAA 842,521
Dallas-Fort Worth, TX, Airport Revenue:
7.75%, 11/1/03 (c)..................................................... 1,000,000 AAA 1,186,900
7.8%, 11/1/05 (c)...................................................... 2,000,000 AAA 2,417,860
7.8%, 11/1/06 (c)...................................................... 2,025,000 AAA 2,432,288
7.375%, 11/1/08 (c).................................................... 4,500,000 AAA 5,238,945
7.375%, 11/1/10 (c).................................................... 3,500,000 AAA 4,020,660
Harris County, TX, General Obligation:
Flood Control District, Zero Coupon, 10/1/00 (c)....................... 1,000,000 AAA 788,260
Capital Appreciation Bond, Zero Coupon, 10/1/06 (c).................... 9,035,000 AAA 5,020,930
Harris County, TX, General Obligation, Toll Road Authority, Subordinate
Lien, Unlimited Tax:
Series A, Zero Coupon, 8/15/04 (c).................................. 2,050,000 AAA 1,300,746
Series A, Zero Coupon, 8/15/05 (c).................................. 4,025,000 AAA 2,403,126
Series A, Zero Coupon, 8/15/06 (c).................................. 4,010,000 AAA 2,243,635
5%, 8/15/07 (c)..................................................... 3,500,000 AAA 3,435,285
Houston, TX, Water & Sewer System Authority:
Series C, Zero Coupon, 12/1/06 (c)..................................... 14,575,000 AAA 8,027,619
Series C, Zero Coupon, 12/1/08 (c)..................................... 10,000,000 AAA 4,794,000
Series C, Zero Coupon, 12/1/09 (c)..................................... 14,750,000 AAA 6,577,763
Lubbock, TX, Health Facilities Development Corporation,
Methodist Hospital:
Series B, 5.5%, 12/1/06 (c)......................................... 3,945,000 AAA 4,067,611
Series B, 5.6%, 12/1/07 (c)......................................... 2,415,000 AAA 2,487,885
Series B, 5.625%, 12/1/08 (c)....................................... 4,400,000 AAA 4,500,364
Series B, 5.625%, 12/1/09 (c)....................................... 4,640,000 AAA 4,691,550
Montgomery County, TX, General Obligation, Library Refunding:
Zero Coupon, 9/1/03 (c)................................................ 3,475,000 AAA 2,333,532
Zero Coupon, 9/1/04 (c)................................................ 3,475,000 AAA 2,199,918
Zero Coupon, 9/1/05.................................................... 3,475,000 AAA 2,069,953
North Central Texas Health Facilities Development Corporation,
Presbyterian Hospital, Prerefunded 12/1/97 at 102, 8.75%, 12/1/15 (c).. 5,000,000 AAA 5,583,550
San Antonio, TX, Electric & Gas Revenue Refunding, Series A:
Zero Coupon, 2/1/05 (c)................................................ 2,500,000 AAA 1,535,200
Zero Coupon, 2/1/06 (c)................................................ 17,900,000 AAA 10,307,715
Series B, Zero Coupon, 2/1/05 (c)...................................... 8,000,000 AAA 4,912,640
Tarrant County, TX, Health Facilities Development Corporation, Hospital
Refunding Revenue, Fort Worth Osteopathic Hospital:
6%, 5/15/11 (c)..................................................... 4,615,000 AAA 4,780,817
6%, 5/15/21 (c)..................................................... 6,235,000 AAA 6,337,005

</TABLE>

The accompanying notes are an integral part of the financial statements.

53
<PAGE>

AARP INSURED TAX FREE
GENERAL BOND FUND
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)

<S> <C> <C> <C>
Texas General Obligation, Superconductor Revenue, Series C,
Zero Coupon, 4/1/05 (c)................................................ 8,390,000 AAA 5,107,496
Texas General Obligation, Capital Appreciation Bond, Super Collider,
Series C, Zero Coupon, 4/1/06 (c)...................................... 7,385,000 AAA 4,214,915
Texas Municipal Power Agency Revenue:
5.25%, 9/1/12 (c)...................................................... 2,900,000 AAA 2,735,280
5.25%, 9/1/07 (c)...................................................... 1,500,000 AAA 1,511,835
5.25%, 9/1/09 (c)...................................................... 6,235,000 AAA 6,120,027
6.1%, 9/1/07 (c)....................................................... 9,250,000 AAA 10,042,263
6.1%, 9/1/09 (c)....................................................... 4,435,000 AAA 4,808,383
Texas State Public Finance Authority, Building Authority:
Zero Coupon, 2/1/06 (c)................................................ 13,915,000 AAA 8,012,953
Series B, 6.25%, 2/1/08 (c)............................................ 5,190,000 AAA 5,656,477

UTAH
Utah Associated Municipal Power System, Hunter Project, Refunding
Revenue, Zero Coupon:
7/1/00 (c).......................................................... 2,755,000 AAA 2,190,473
7/1/02 (c).......................................................... 5,200,000 AAA 3,690,596
7/1/04 (c).......................................................... 5,895,000 AAA 3,719,214
7/1/05 (c).......................................................... 5,900,000 AAA 3,498,228
7/1/06 (c).......................................................... 5,895,000 AAA 3,271,607
7/1/07 (c).......................................................... 3,750,000 AAA 1,943,475
Intermountain Power Agency, UT, Power Supply Revenue:
Series A, Zero Coupon, 7/1/02 (c))..................................... 1,655,000 AAA 1,180,048
Series A, Zero Coupon, 7/1/03 (c)...................................... 1,000,000 AAA 673,600
Series A, Zero Coupon, 7/1/04 (c)...................................... 1,730,000 AAA 1,098,031
Series B, Zero Coupon, 7/1/02 (c)...................................... 8,230,000 AAA 5,868,155
5%, 7/1/12 (c)......................................................... 1,000,000 AAA 906,920
Provo, UT, Electric System Revenue, ETM, 10.375%, 9/15/15 (c)**........... 1,800,000 AAA 2,581,506

VIRGINIA
Roanoke, VA, Industrial Development Authority, Roanoke Memorial
Hospital, Series B, 6.125%, 7/1/17 (c)................................. 5,500,000 AAA 5,711,750
Southeastern Public Service Authority, VA, Refunding Revenue,
Series A, 5.25%, 7/1/10 (c)............................................ 7,380,000 AAA 7,158,157
Virginia Beach, VA, Development Authority, Virginia Beach General
Hospital Project:
5%, 2/15/06 (c)..................................................... 1,750,000 AAA 1,738,695
5%, 2/15/07 (c)..................................................... 1,800,000 AAA 1,764,702
5.1%, 2/15/08 (c)................................................... 1,345,000 AAA 1,311,792
5.125%, 2/15/18 (c)................................................. 3,000,000 AAA 2,726,790
6%, 2/15/11 (c)..................................................... 1,595,000 AAA 1,661,735
Winchester County, VA, Industrial Development Authority, Hospital
Revenue, 6%, 1/1/15 (c)................................................ 5,700,000 AAA 5,236,134

WASHINGTON
King County, WA, Public Hospital District -1, Valley Medical Center,
Series 1992, 5.5%, 9/1/17 (c).......................................... 3,500,000 AAA 3,283,840
King & Snohomish Counties, WA, General Obligation, School
District -417, North Shore:
5.45%, 12/1/06 (c)..................................................... 2,825,000 AAA 2,900,880

</TABLE>

The accompanying notes are an integral part of the financial statements.

54
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
<S> <C> <C> <C>
5.6%, 12/1/10 (c)........................................................... 1,650,000 AAA 1,641,503
Snohomish County, WA, Public Utilities, District #1:
5.5%, 1/1/14 (c)............................................................ 6,000,000 AAA 5,675,580
5.5%, 1/1/15 (c)............................................................ 1,350,000 AAA 1,271,916
Snohomish County, WA, School District #6, 6.5%, 12/1/07....................... 3,325,000 A 3,698,165
Washington Health Care Facilities Authority, Empire Health
Services-Spokane:
5.65%, 11/1/05 (c)........................................................ 2,155,000 AAA 2,249,152
5.7%, 11/1/06 (c)......................................................... 3,440,000 AAA 3,577,462
5.75%, 11/1/07 (c)........................................................ 3,675,000 AAA 3,807,704
5.8%, 11/1/09 (c)......................................................... 4,595,000 AAA 4,687,911
5.8%, 11/1/10 (c)......................................................... 2,100,000 AAA 2,116,674
Washington Public Power Supply System, Revenue Refunding:
Nuclear Project #1, Series A, Prerefunded 7/1/99 at 102, 7.5%, 7/1/15 (c)... 2,405,000 AAA 2,705,529
Nuclear Project #1, Series A, 7%, 7/1/11 (c)................................ 3,830,000 AAA 4,207,332
Nuclear Project #1, Series A, 7.5%, 7/1/15 (c).............................. 1,595,000 AAA 1,755,712
Nuclear Project #1, Series B, 7.25%, 7/1/12 (c)............................. 10,895,000 AAA 12,082,446
Nuclear Project #2, Series A, 7.25%, 7/1/03 (c)............................. 2,000,000 AAA 2,255,180
Nuclear Project #2, Series A, 5.7%, 7/1/08 (c).............................. 5,000,000 AAA 5,099,500
Nuclear Project #2, Series C, 7%, 7/1/01 (c)................................ 10,000,000 AAA 11,067,500
Nuclear Project #2, Series C, 7.375%, 7/1/11 (c)............................ 1,370,000 AAA 1,569,897
Nuclear Project #3, Series A, Prerefunded 11/1/01 at 102, 7.25%, 7/1/16 (c). 3,630,000 AAA 4,052,496
Nuclear Project #3, Series A, Zero Coupon, 7/1/04 (c)....................... 3,625,000 AAA 2,287,049
Nuclear Project #3, Series A, Zero Coupon, 7/1/05 (c)....................... 4,125,000 AAA 2,445,795
Washington State Housing Finance, Series A, 7.1%, 12/1/17..................... 12,245,000 AAA 12,845,250
WEST VIRGINIA
West Virginia School Building Authority, Series 1990-B, 6.75%, 7/1/10 (c)..... 4,000,000 AAA 4,362,960
WISCONSIN
Kenosha, WI, General Obligation, Series C, Zero Coupon, 6/1/04 (c)............ 3,475,000 AAA 2,202,073
Wisconsin Health & Educational Facilities Authority:
Wheaton Franciscan Services, 6.1%, 8/15/08 (c).............................. 4,580,000 AAA 4,865,609
Felician Healthcare Inc., Series B, 6.25%, 1/1/22 (c)....................... 5,285,000 AAA 5,486,517
Villa St. Francis Inc., Series C, 6.25%, 1/1/22 (c)......................... 9,230,000 AAA 9,581,940
SSM Healthcare, Series 1992 AA, 6.4%, 6/1/08 (c)............................ 2,335,000 AAA 2,533,638
SSM Healthcare, Series 1992 AA, 6.45%, 6/1/09 (c)........................... 2,485,000 AAA 2,689,590
SSM Healthcare, Series 1992 AA, 6.45%, 6/1/10 (c)........................... 2,650,000 AAA 2,842,761
SSM Healthcare, Series 1992 AA, 6.5%, 6/1/12 (c)............................ 3,000,000 AAA 3,228,840
SM Healthcare, Series 1992 AA, 6.5%, 6/1/22 (c)............................. 2,820,000 AAA 3,030,175
St. Luke's Medical Center, 7.1%, 8/15/11 (c)................................ 2,000,000 AAA 2,217,600
Riverview Hospital Association Project, 9%, 5/1/11 (c)...................... 2,500,000 AAA 2,626,025
Hospital Sisters Services Inc. - Obligated Group, 5.375%, 6/1/18............ 4,800,000 AAA 4,391,605
-------------
Total Longer-Term Municipal Investments (Cost $1,633,171,528)................. 1,713,088,074
-------------
</TABLE>

<TABLE>
<CAPTION>
SUMMARY % OF NET ASSETS
<S> <C> <C>
Total Investment Portfolio (Cost $1,704,118,553) (a)..... 98.7 1,784,155,534
Other Assets and Liabilities, Net........................ 1.3 22,891,788
----- -------------
Net Assets............................................... 100.0 1,807,047,322
===== =============
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

AARP INSURED TAX FREE GENERAL BOND FUND

* Floating rate demand notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon-equivalent of
the U.S. Treasury bill rate. Variable rate demand notes are securities
whose interest rates are reset periodically at levels that are generally
comparable to tax-exempt commercial paper. These securities are payable on
demand within seven calendar days and normally incorporate an irrevocable
letter of credit or line of credit from a major bank. Since these
securities are payable on demand, they are valued at 100% of their
principal.

** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by a
trustee and used to pay principal and interest on bonds so designated.

(a) At September 30, 1995, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $1,704,514,224 was as follows:

<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost .. $88,536,219
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value .. (8,894,909)
-----------
Net unrealized appreciation ..................................................................................... $79,641,310
===========
</TABLE>

(b) (Unaudited) All of the securities held have been determined to be of
appropriate credit quality as required by the Fund's investment objectives.
Credit ratings shown are either Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. Unrated securities (NR) have been determined to be
of comparable quality to rated eligible securities.

(d) At September 30, 1995, these securities, in whole or in part, have been
pledged to cover initial margin requirements for open futures contracts.

At September 30, 1995, open futures contracts sold short were as follows
(Note 1):

<TABLE>
<CAPTION>
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
------- ---------- --------- -------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Bond ............ December 1995 1,500 170,885,736 171,515,625
----------- -----------
Total net unrealized depreciation on open futures contracts sold short .............. (629,889)
===========
</TABLE>

The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1995 was $648,776,784 and $520,647,998,
respectively.

Purchases and sales of investment securities (excluding short-term
investments), for the year ended September 30, 1995, aggregated
$295,103,254 and $399,367,602, respectively.

At September 30, 1995, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $3,587,586 which expires
September 30, 2003. In addition, from November 1, 1994 through September
30, 1995, the Fund incurred approximately $12,265,621 of net realized
capital losses which the Fund intends to elect to defer and treat as
arising in the fiscal year ended September 30, 1996.

Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

56
<PAGE>
AARP Balanced Stock and
Bond Fund

LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1995

Principal Market
Amount ($) Value ($)
<S> <C>

REPURCHASE AGREEMENTS 7.1%

17,687,000 Repurchase Agreement with Salomon Brothers Inc., dated 9/29/95 at
6.07%, to be repurchased at $17,695,947 on 10/2/95, collateralized by a
$13,939,000 U.S. Treasury Note, 9.25%, 2/15/16 (Cost $17,687,000) .............. 17,687,000
----------

COMMERCIAL PAPER 11.1%

12,000,000 Ciesco L.P., 5.71%, 11/1/95 ...................................................... 11,939,520
12,000,000 Ford Motor Credit Corp., 5.65%, 12/29/95 ......................................... 11,954,320
3,643,000 New Center Asset Trust, 5.73%, 10/20/95 .......................................... 3,631,983
----------
Total Commercial Paper (Cost $27,525,823) ........................................ 27,525,823
----------

U.S. TREASURY OBLIGATIONS 11.5%

4,600,000 U.S. Treasury Bond, 7.25%, 5/15/16 ............................................... 4,916,986
2,750,000 U.S. Treasury Bond, 7.875%, 2/15/21 .............................................. 3,153,480
2,000,000 U.S. Treasury Note, 4.625%, 2/29/96 .............................................. 1,992,180
4,000,000 U.S. Treasury Note, 5.5%, 9/30/97 (b) ............................................ 3,975,640
2,500,000 U.S. Treasury Note, 5.13%, 4/30/98 ............................................... 2,454,300
2,500,000 U.S. Treasury Note, 5.875%, 3/31/99 .............................................. 2,493,350
3,250,000 U.S. Treasury Note, 6.875%, 7/31/99 .............................................. 3,346,493
4,500,000 U.S. Treasury Note, 6%, 10/15/99 ................................................. 4,504,185
3,500,000 U.S. Treasury Separate Trading Registered Interest and Principal,2/15/09
(6.597%**).............................................................. 1,469,055
----------
Total U.S. Treasury Obligations (Cost $27,181,297) ............................... 28,305,669
----------

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 3.6%

3,029,997 Government National Mortgage Association, 6.5%, 11/15/09 ......................... 2,999,697
2,940,000 Government National Mortgage Association, 7.5%, 9/15/25 .......................... 2,969,400
2,750,776 Government National Mortgage Association, 10%, 2/15/25 ........................... 3,011,632
----------
Total Government National Mortgage Association (Cost $8,940,812) ................. 8,980,729
----------

U.S. GOVERNMENT AGENCY MORTGAGE PASS-THRUS* 3.8%

3,000,000 Federal National Mortgage Association, 5.5%, 7/1/09 .............................. 2,856,540
3,267,315 Federal National Mortgage Association, 7%, 8/1/25 ................................ 3,222,389
3,250,000 Federal National Mortgage Association, 7%, 9/1/25 ................................ 3,205,313
----------
Total U.S. Government Agency Mortgage Pass-Thrus (Cost $9,308,153) ............... 9,284,242
----------

FOREIGN BONDS--U.S.$ DENOMINATED 0.4%

1,000,000 ABN-AMRO Bank NV, subordinated note, 7.13%, 10/15/2093
(Cost $857,331) ................................................................ 922,420
----------
</TABLE>

The accompanying notes are an integral part of the financial statements.
57

<PAGE>

AARP Balanced Stock and
Bond Fund

Principal Market
Amount ($) Value ($)

<S> <C>

FOREIGN BONDS--NON-U.S.$ DENOMINATED 1.6%

DEM 2,800,000 Federal Republic of Germany, 6.5%, 7/15/03 ................................ 1,966,959
FRF 9,700,000 Government of France, 7.5%, 4/25/05 ....................................... 1,980,437
---------
Total Foreign Bonds - Non U.S.$ Denominated (Cost $3,961,935) ............. 3,947,396
---------

ASSET-BACKED 0.8%

Credit Card Receivables
2,000,000 Sears Credit Account Master Trust Series 1995-4, 6.25%, 1/15/03
(Cost $1,997,500) ........................................................... 2,001,860
---------

CORPORATE BONDS 3.6%

Consumer Staples 0.8%
Food & Beverage
2,000,000 Borden Inc., 7.875%, 2/15/23 ................................................... 1,903,240
---------
Financial 0.4%
Other Financial Companies
1,000,000 General Electric Capital Services, 7.5%, 8/21/35 ............................... 1,044,340
---------
Durables 1.7%
Aerospace 0.9%
1,000,000 Boeing Co., 6.875%, 10/15/43 ................................................... 943,940
1,000,000 McDonnell Douglas Corp., 9.75%, 4/1/12 ......................................... 1,212,280
---------
2,156,220
---------
Automobiles 0.8%
1,000,000 Ford Motor Co., 8.875%, 1/15/22 ................................................ 1,170,400
1,000,000 General Motors Acceptance Corp., 5.75%, 4/4/96 ................................. 997,870
---------
2,168,270
---------
Technology 0.7%
Military Electronics
1,500,000 Loral Corp., 8.375%, 6/15/24 ................................................... 1,620,345
---------
Total Corporate Bonds (Cost $8,451,765) ........................................ 8,892,415
---------

CONVERTIBLE BONDS 1.6%

Health 0.1%
Pharmaceuticals
290,000 Sandoz Capital BVI Ltd., 2%, 10/6/02 ........................................... 245,050
---------
Financial 0.1%
Other Financial Companies
200,000 First Financial Management Corp., 5%, 12/15/99 ................................. 298,000
---------
Service Industries 0.2%
Miscellaneous Commercial Services
1,000,000 ADT Operations Inc., Zero Coupon Liquid Yield Option Note, 7/6/10 .............. 437,500
---------

</TABLE>

The accompanying notes are an integral part of the financial statements.
58

<PAGE>

Principal Market
Amount ($) Value ($)

<S> <C>
Technology 1.2%
Semiconductors
2,880,000 VLSI Technology, Inc., 8.25%, 10/1/05 .......................................... 2,908,800
---------
Construction 0.0%
Homebuilding
30,000 Empresa ICA Sociedad Controladora S.A., 5%, 3/15/04 ............................ 17,400
---------
Total Convertible Bonds (Cost $3,755,276) ...................................... 3,906,750
---------

CONVERTIBLE PREFERRED STOCKS 1.9%

Shares
------
Health 0.5%
Health Industry Services
57,900 FHP International Corp.,"A", Cum. $1.25 ........................................ 1,375,125
---------
Financial 0.6%
Consumer Finance
33,100 Advanta Corp. 6.75% ............................................................ 1,390,200
---------
Service Industries 0.4%
EDP Services
16,100 General Motors Corp., Series C, Cum. $3.25 (convertible into GM "E") ........... 1,044,488
---------
Manufacturing 0.3%
Containers & Paper 0.2%
3,300 Boise Cascade Corp. "G", Cum $1.58 ............................................. 110,963
4,100 Bowater, Inc. 7% "B" ........................................................... 160,925
2,100 International Paper Co., 5.25% ................................................. 99,225
---------
371,113
---------
Industrial Specialty 0.1%
7,900 Corning Delaware L.P., Cum. $3.00 .............................................. 369,325
---------
Energy 0.1%
Oil & Gas Production
4,200 Parker & Parsley Capital Corp. ................................................. 189,525
---------
Total Convertible Preferred Stocks (Cost $4,480,464) ........................... 4,739,776
---------

COMMON STOCKS 52.5%

Consumer Discretionary 2.1%
Department & Chain Stores 2.0%
39,600 J.C. Penney Co., Inc. .......................................................... 1,965,150
26,100 Melville Corp. ................................................................. 900,450
35,700 Rite Aid Corp. ................................................................. 999,600
27,000 Sears, Roebuck & Co. ........................................................... 995,625
---------
4,860,825
---------
Restaurants 0.1%
28,300 Darden Restaurants Inc. ........................................................ 325,450
---------
</TABLE>

The accompanying notes are an integral part of the financial statements.
59

<PAGE>

AARP Balanced Stock and
Bond Fund

<TABLE>
<CAPTION>
Market
Shares Value ($)

<S> <C>

Consumer Staples 4.9%
Alcohol & Tobacco 0.7%
26,600 Anheuser Busch Companies, Inc. ................................................. 1,659,175
----------
Food & Beverage 2.1%
28,300 General Mills, Inc. ............................................................ 1,577,725
48,900 H.J. Heinz Co. ................................................................. 2,237,175
39,200 Quaker Oats Co. ................................................................ 1,298,500
----------
5,113,400
----------
Package Goods/Cosmetics 2.1%
26,300 Avon Products Inc. ............................................................. 1,887,025
21,000 Clorox Co. ..................................................................... 1,498,875
6,400 Colgate-Palmolive Co. .......................................................... 426,400
33,200 Tambrands Inc. ................................................................. 1,456,650
----------
5,268,950
----------
Health 7.0%
Health Industry Services 0.3%
7,200 McKesson Corp. ................................................................. 324,000
9,300 U.S. HealthCare, Inc. .......................................................... 328,988
----------
652,988
----------
Pharmaceuticals 6.7%
23,300 American Home Products Corp. ................................................... 1,977,588
65,800 Baxter International Inc. ...................................................... 2,706,025
21,200 Bristol-Myers Squibb Co. ....................................................... 1,544,950
31,000 Carter-Wallace Inc. ............................................................ 387,500
31,500 Eli Lilly Co. .................................................................. 2,831,063
42,700 Schering-Plough Corp. .......................................................... 2,199,050
39,200 SmithKline Beecham PLC (ADR) ................................................... 1,984,500
19,300 Warner-Lambert Co. ............................................................. 1,838,325
62,100 Zeneca Group PLC ............................................................... 1,121,807
----------
16,590,808
----------
Communications 2.7%
Telephone/Communications
67,100 Alltel Corp. ................................................................... 2,004,613
42,100 GTE Corp. ...................................................................... 1,652,425
56,700 Hong Kong Telecommunications Ltd. (ADR) ........................................ 1,034,775
33,600 Sprint Corp. ................................................................... 1,176,000
29,900 Tele Danmark A/S (ADR) ......................................................... 773,663
----------
6,641,476
----------
Financial 10.8%
Banks 3.7%
15,700 Bankers Trust New York Corp. ................................................... 1,102,925
28,300 Chemical Banking Corp. ......................................................... 1,722,763
45,500 CoreStates Financial Corp. ..................................................... 1,666,438
59,000 First Bank System Inc. ......................................................... 2,839,375
</TABLE>

The accompanying notes are an integral part of the financial statements.
60
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
<S> <C>
23,200 J.P. Morgan & Co., Inc. ........................................................ 1,795,100
----------
9,126,601
----------
Insurance 2.1%
25,029 Allstate Corp. ................................................................. 885,401
22,900 EXEL, Ltd. ..................................................................... 1,331,063
14,400 Hartford Steam Boiler Inspection & Insurance Co. ............................... 696,600
47,300 Lincoln National Corp. ......................................................... 2,229,013
----------
5,142,077
----------
Other Financial Companies 2.1%
14,800 Federal National Mortgage Association .......................................... 1,531,800
69,500 Student Loan Marketing Association ............................................. 3,753,000
----------
5,284,800
----------
Real Estate 2.9%
31,872 HGI Realty, Inc. (REIT) ........................................................ 764,928
51,100 Health Care Property Investment Inc. (REIT) .................................... 1,731,013
55,400 Meditrust SBI (REIT) ........................................................... 1,918,225
50,800 Nationwide Health Properties Inc. (REIT) ....................................... 2,082,800
26,000 Omega Healthcare Investors (REIT) .............................................. 695,500
----------
7,192,466
----------
Media 0.3%
Print Media
14,800 Reader's Digest Association Inc. "A" ........................................... 697,450
----------
Service Industries 2.0%
Miscellaneous Commercial Services 0.1%
260,000 Jardine Strategic Holdings Ltd. ................................................ 263,900
----------
Miscellaneous Consumer Services 1.0%
63,900 H & R Block Inc. ............................................................... 2,428,200
----------
Printing/Publishing 0.9%
53,400 Deluxe Corp. ................................................................... 1,768,875
6,200 Dun & Bradstreet Corp. ......................................................... 358,825
----------
2,127,700
----------
Durables 4.6%
Aerospace 4.3%
25,700 AAR Corp. ...................................................................... 469,025
36,472 Lockheed Martin Corp. .......................................................... 2,448,183
39,800 Rockwell International Corp. ................................................... 1,880,550
47,500 Thiokol Corp. .................................................................. 1,698,125
45,400 United Technologies Corp. ...................................................... 4,012,225
----------
10,508,108
----------
Automobiles 0.3%
28,000 Dana Corp. ..................................................................... 808,500
----------
Manufacturing 8.9%
Chemicals 2.1%
15,600 Dow Chemical Co. ............................................................... 1,162,200
34,100 E.I. du Pont de Nemours & Co. .................................................. 2,344,375
</TABLE>

The accompanying notes are an integral part of the financial statements.
61

<PAGE>

AARP Balanced Stock and
Bond Fund

<TABLE>
<CAPTION>
Market
Shares Value ($)

<S> <C>
7,000 Lubrizol Corp. ................................................................. 228,375
55,400 Lyondell Petrochemical Co. ..................................................... 1,433,475
----------
5,168,425
----------
Containers & Paper 1.0%
4,100 Federal Paper Board Co., Inc. .................................................. 156,464
32,600 Kimberly-Clark Corp. ........................................................... 2,188,275
----------
2,344,739
----------
Diversified Manufacturing 2.1%
75,200 Dresser Industries Inc. ........................................................ 1,795,400
12,700 Olin Corp. ..................................................................... 873,125
35,200 TRW Inc. ....................................................................... 2,618,000
----------
5,286,525
----------
Electrical Products 0.5%
19,400 Thomas & Betts Corp. ........................................................... 1,253,725
----------
Machinery/Components/Controls 0.4%
23,800 Timken Co. ..................................................................... 1,014,475
----------
Office Equipment/Supplies 1.3%
24,100 Xerox Corp. .................................................................... 3,238,438
----------
Specialty Chemicals 1.3%
35,100 Betz Laboratories Inc. ......................................................... 1,434,713
53,400 Witco Corp. .................................................................... 1,875,675
----------
3,310,388
----------
Wholesale Distributors 0.2%
4,700 Alco Standard Corp. ............................................................ 395,975
----------
Energy 5.4%
Engineering 0.4%
48,000 McDermott International Inc. ................................................... 948,000
----------
Oil Companies 4.4%
21,000 Exxon Corp. .................................................................... 1,517,250
30,000 Murphy Oil Corp. ............................................................... 1,200,000
24,500 Pennzoil Co. ................................................................... 1,074,938
25,500 Repsol SA (ADR) ................................................................ 809,625
13,800 Royal Dutch Petroleum Co. (New York shares) .................................... 1,693,950
32,481 Societe Nationale Elf Aquitaine (ADR) .......................................... 1,092,174
17,200 Texaco Inc. .................................................................... 1,111,550
27,980 Total SA (ADR) ................................................................. 842,898
87,200 YPF SA "D" (ADR) ............................................................... 1,569,600
----------
10,911,985
----------
Oilfield Services/Equipment 0.6%
37,900 Halliburton Co. ................................................................ 1,582,325
----------
Metals & Minerals 1.3%
Steel & Metals
65,200 Freeport McMoRan Copper & Gold, Inc. "A" ....................................... 1,670,750
101,500 Oregon Steel Mills Inc. ........................................................ 1,624,000
----------
3,294,750
----------
</TABLE>

The accompanying notes are an integral part of the financial statements.
62

<PAGE>

<TABLE>
<CAPTION>
Market
Shares Value ($)

<S> <C>
Utilities 2.5%
Electric Utilities
37,100 CINergy Corp. ................................................................. 1,034,163
20,700 CMS Energy Corp. .............................................................. 543,375
42,500 National Power PLC (ADR) ...................................................... 616,250
26,100 PacifiCorp. ................................................................... 495,900
14,300 Pacific Gas & Electric Co. .................................................... 427,213
31,200 PowerGen PLC (ADR) ............................................................ 487,500
50,500 Southern Company .............................................................. 1,193,063
10,500 Texas Utilities Co., Inc. ..................................................... 366,188
38,700 Unicom Corp. .................................................................. 1,170,664
-----------
6,334,316
-----------
Total Common Stocks (Cost $110,748,570) ....................................... 129,776,940
-----------
</TABLE>

SUMMARY % OF NET ASSETS
<S> <C> <C>
Total Investment Portfolio (Cost $224,895,926) (a) ........... 99.5 245,971,020
Other Assets and Liabilities, Net ............................ 0.5 1,235,935
----- -----------
Net Assets ................................................... 100.0 247,206,955
===== ===========

REIT Real Estate Investment Trust
* Effective maturities will be shorter due to amortization and prepayments.

** Yield (unaudited); bond equivalent yield to maturity; not a coupon rate.

(a) At September 30, 1995, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $225,012,253 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess of value over tax cost ....................................................... $22,507,829

Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value ....................................................... (1,549,062)
-----------
Net unrealized appreciation ............................................................... 20,958,767
===========

(b) At September 30, 1995, these securities, in whole or in part, were pledged
to cover initial margin requirements for open futures contracts.

At September 30, 1995, open futures contracts purchased were as follows (Note1):
</TABLE>

<TABLE>
<CAPTION>
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury Notes ..... December 1995 33 3,641,641 3,638,250
--------- ---------
Total net unrealized depreciation on open futures contracts purchased ...................... (3,391)
=========
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1995 was $7,225,532 and $3,583,891 respectively.

For the year ended September 30, 1995, purchases and sales of investment securities
(excluding short-term investments) aggregated $107,873,081 and $68,779,401,
respectively. Purchases and sales of U.S. Government obligations and U.S. Government
Agencies aggregated $30,836,551 and $30,995,075, respectively.

Percentage breakdown of investments is based on total net assets of the Fund.
The total net assets of the Fund are comprised of the Fund's investment portfolio,
other assets and liabilities. The percentage of the investment portfolio may
be greater or less than 100% due to the inclusion of the Fund's assets and
liabilities in the calculation. The Fund's other assets and liabilities are
disclosed in the Statement of Assets and Liabilities.
</TABLE>

The accompanying notes are an integral part of the financial statements.

63
<PAGE>
AARP GROWTH AND INCOME FUND

LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1995

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)

<S> <C> <C>
REPURCHASE AGREEMENTS 0.8%

25,079,000 Repurchase Agreement with Salomon Brothers dated 9/29/95
at 6.07% to be repurchased at $25,091,686 on 10/2/95, collateralized
by a $24,668,000 U.S. Treasury Note, 7.25%, 2/15/98 (Cost $25,079,000)..... 25,079,000
----------

COMMERCIAL PAPER 2.6%

20,000,000 Associates Corp. of North America, 5.51%, 10/26/95........................... 19,920,694
20,000,000 CIESCO, 5.51%, 10/27/95...................................................... 19,917,667
30,000,000 Ford Motor Credit Co., 5.50%, 10/24/95....................................... 29,890,367
10,000,000 Prudential Funding Corp., 5.25%, 10/12/95.................................... 9,982,522
----------
TOTAL COMMERCIAL PAPER (COST $79,711,250).................................... 79,711,250
----------

CORPORATE BONDS 0.2%

MANUFACTURING
Electrical Products
4,500,000 Siemens Capital Corp., with warrants, 8%, 6/24/02 (Cost $5,885,818).......... 5,985,000
----------

CONVERTIBLE BONDS 2.8%

CONSUMER DISCRETIONARY 0.1%
Department & Chain Stores
4,000,000 Federated Department Stores, Inc. debenture, 5%, 10/1/03..................... 4,080,000
----------

HEALTH 0.3%
Health Industry Services 0.1%
2,000,000 Hillhaven Corp., 7.75%, 11/1/02.............................................. 3,620,000
----------
Pharmaceuticals 0.2%
6,260,000 Sandoz Capital BVI Ltd., 2%, 10/6/02.......................................... 5,274,050
----------

COMMUNICATIONS 0.0%
Telephone/Communications
1,000,000 Compania de Telefonos de Chile, S.A., 4.5%, 1/15/03.......................... 1,015,000
----------

FINANCIAL 0.9%
Banks 0.6%
17,290,000 MBL International Finance Bermuda, 3%, 11/30/02.............................. 18,068,050
----------
Other Financial Companies 0.3%
5,200,000 First Financial Management Corp., 5%, 12/15/99............................... 7,826,000
----------

MEDIA 0.1%
Broadcasting & Entertainment
8,000,000 Time Warner Inc., Zero Coupon Liquid Yield Option Note, 6/22/13.............. 3,230,000
----------

SERVICE INDUSTRIES 0.4%
Miscellaneous Commercial Services
25,000,000 ADT Operations Inc., Zero Coupon Liquid Yield Option Note, 7/6/10............ 10,937,500
----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

64
<PAGE>

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)

<S> <C> <C>
TECHNOLOGY 0.2%
Electronic Data Processing 0.1%
8,000,000 Silicon Graphics Inc., 11/5/13............................................... 4,760,000
----------
Precision Instruments 0.1%
1,000,000 Thermo Instruments Systems Inc., 6.625%, 8/15/01............................. 2,360,000
----------

CONSTRUCTION 0.2%
Homebuilding
10,670,000 Empresa ICA Sociedad Controladora S.A., 5%, 3/15/04.......................... 6,188,600
----------

TRANSPORTATION 0.4%
Airlines
13,500,000 Delta Air Lines, Inc., 3.23%, 6/15/03........................................ 12,116,250
----------

UTILITIES 0.2%
Electric Utilities
2,500,000 National Power PLC, 6.25%, 9/23/08........................................... 4,710,229
----------
TOTAL CONVERTIBLE BONDS (COST $79,536,177)................................... 84,185,679
----------

CONVERTIBLE PREFERRED STOCKS 3.3%

<CAPTION>
Shares
------
HEALTH 0.9%
Health Industry Services 0.9%
1,091,200 FHP International Corp.,"A", Cum. $1.25...................................... 25,916,000
----------
Medical Supply & Specialty 0.0%
25,000 US Surgical Corp., "A"....................................................... 750,000
----------

FINANCIAL 0.2%
Consumer Finance
129,000 Advanta Corp., 6.75%......................................................... 5,418,000
----------

MEDIA 0.1%
Print Media
104,400 Times Mirror Co., "B", Cum. $1.38............................................ 2,518,650
----------

SERVICE INDUSTRIES 0.7%
EDP Services
343,400 General Motors Corp., Series C, Cum. $3.25................................... 22,278,075
----------

MANUFACTURING 0.5%
Containers & Paper 0.2%
61,900 Boise Cascade Corp., "G", Cum. $1.58......................................... 2,081,388
50,200 International Paper Co....................................................... 2,371,950
----------
4,453,338
----------
Industrial Specialty 0.3%
211,600 Corning Delaware L.P., Cum. $3.00............................................ 9,892,300
----------

TECHNOLOGY 0.2%
Electronic Data Processing
50,000 Ceridian Corp., Cum. $2.75................................................... 4,937,500
----------

ENERGY 0.3%
Oil & Gas Production
215,300 Parker & Parsley Capital Corp................................................ 9,661,588
----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

65
<PAGE>

AARP GROWTH AND INCOME FUND

<TABLE>
<CAPTION>
Market
Shares Value ($)

<S> <C> <C>
METALS & MINERALS 0.4%
Precious Metals
500,000 Freeport McMoRan Copper & Gold, Inc., Cum. $1.25............................. 12,875,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $93,895,915)........................ 98,700,451
-----------

PREFERRED STOCKS 0.3%

COMMUNICATIONS
Telephone/Communications
140,000 Philippine Long Distance Telephone Co. (Cost $7,000,000)..................... 8,400,000
-----------

COMMON STOCKS 91.1%

CONSUMER DISCRETIONARY 3.6%
Department & Chain Stores 3.4%
845,400 J.C. Penney Co., Inc......................................................... 41,952,975
593,200 Melville Corp................................................................ 20,465,400
778,400 Rite Aid Corp................................................................ 21,795,200
515,400 Sears, Roebuck & Co.......................................................... 19,005,375
-----------
103,218,950
-----------
Restaurants 0.2%
598,000 Darden Restaurants Inc....................................................... 6,877,000
-----------

CONSUMER STAPLES 8.7%
Alcohol & Tobacco 1.3%
631,300 Anheuser Busch Companies, Inc................................................ 39,377,338
900 RJR Nabisco Holdings Corp.................................................... 29,138
-----------
39,406,476
-----------
Consumer Specialties 0.2%
320,900 A.T. Cross Co. "A"........................................................... 5,415,188
-----------
Food & Beverage 3.6%
598,400 General Mills, Inc........................................................... 33,360,800
1,122,600 H.J. Heinz Co................................................................ 51,358,950
733,400 Quaker Oats Co............................................................... 24,293,875
-----------
109,013,625
-----------
Package Goods/Cosmetics 3.6%
561,400 Avon Products Inc............................................................ 40,280,450
402,100 Clorox Co.................................................................... 28,699,888
136,500 Colgate-Palmolive Co......................................................... 9,094,313
643,200 Tambrands Inc................................................................ 28,220,400
-----------
106,295,051
-----------
HEALTH 12.4%
Health Industry Services 0.5%
194,800 McKesson Corp. (New)......................................................... 8,766,000
221,900 U.S. HealthCare, Inc......................................................... 7,849,713
-----------
16,615,713
-----------
Pharmaceuticals 11.9%
558,600 American Home Products Corp.................................................. 47,411,175
1,461,800 Baxter International Inc..................................................... 60,116,525
</TABLE>

The accompanying notes are an integral part of the financial statements.

66
<PAGE>

<TABLE>
<CAPTION>
Market
Shares Value ($)

<S> <C> <C>
464,300 Bristol-Myers Squibb Co...................................................... 33,835,863
849,400 Carter-Wallace Inc........................................................... 10,617,500
674,300 Eli Lilly Co................................................................. 60,602,713
1,006,000 Schering-Plough Corp......................................................... 51,809,000
661,300 SmithKline Beecham PLC (ADR)................................................. 33,478,313
463,300 Warner-Lambert Co............................................................ 44,129,325
859,900 Zeneca Group PLC............................................................. 15,507,059
300 Zeneca Group PLC (ADR)....................................................... 16,350
-----------
357,523,823
-----------
COMMUNICATIONS 5.1%
Telephone/Communications
1,465,300 Alltel Corp.................................................................. 43,775,838
892,500 GTE Corp..................................................................... 35,030,625
1,215,300 Hong Kong Telecommunications Ltd. (ADR)...................................... 22,179,225
826,200 Sprint Corp.................................................................. 28,917,000
802,100 Tele Danmark A/S "B" (ADR)................................................... 20,754,338
898,915 Telecom Italia SIP........................................................... 1,485,879
898,915 Telecom Italia SIP........................................................... 1,499,818
-----------
153,642,723
-----------
FINANCIAL 18.0%
Banks 7.5%
286,000 AmSouth Bancorp.............................................................. 10,868,000
417,300 Bankers Trust New York Corp.................................................. 29,315,325
599,900 Chemical Banking Corp........................................................ 36,518,913
983,800 CoreStates Financial Corp.................................................... 36,031,675
1,258,600 First Bank System Inc........................................................ 60,570,125
394,100 J.P. Morgan & Co., Inc....................................................... 30,493,488
393,100 Summit Bancorporation........................................................ 10,957,663
190 Swiss Bank Corp.............................................................. 72,663
295,300 Wilmington Trust Corp........................................................ 8,711,350
-----------
223,539,202
-----------
Insurance 4.1%
213,800 Aetna Life & Casualty Co..................................................... 15,687,575
477,423 Allstate Corp................................................................ 16,888,840
489,550 EXEL, Ltd.................................................................... 28,455,094
306,600 Hartford Steam Boiler Inspection & Insurance Co.............................. 14,831,775
1,010,200 Lincoln National Corp........................................................ 47,605,675
-----------
123,468,959
-----------
Other Financial Companies 3.5%
314,700 Federal National Mortgage Association........................................ 32,571,450
1,350,100 Student Loan Marketing Association........................................... 72,905,400
-----------
105,476,850
-----------
Real Estate 2.9%
245,800 Avalon Properties, Inc. (REIT)............................................... 5,008,175
386,200 Camden Property Trust (REIT)................................................. 8,544,675
88,500 Charles E. Smith Residential Realty, Inc. (REIT)............................. 2,046,563
28,000 Equity Residential Properties Trust (REIT)................................... 843,500
</TABLE>

The accompanying notes are an integral part of the financial statements.

67
<PAGE>

AARP GROWTH AND INCOME FUND

<TABLE>
<CAPTION>
Market
Shares Value ($)

312,700 General Growth Properties, Inc. (REIT)....................................... 6,449,438
103,424 HGI Realty, Inc. (REIT)...................................................... 2,482,176
409,800 Health Care Property Investment Inc. (REIT).................................. 13,881,975
31,100 Mark Centers Trust (REIT).................................................... 380,975
457,900 Meditrust SBI (REIT)......................................................... 15,854,788
340,400 Nationwide Health Properties Inc. (REIT)..................................... 13,956,400
71,200 Post Properties Inc. (REIT).................................................. 2,207,200
398,500 Security Capital Industrial Trust (REIT)..................................... 6,475,625
451,200 Southwestern Properties Trust Inc. (REIT).................................... 5,752,800
102,100 Vornado Realty Trust (REIT).................................................. 3,828,750
-----------
87,713,040
-----------
MEDIA 0.5%
Print Media
336,400 Reader's Digest Association Inc. "A"......................................... 15,852,850
-----------
SERVICE INDUSTRIES 3.8%
Miscellaneous Commercial Services 0.3%
7,036,000 Jardine Strategic Holdings Ltd............................................... 7,141,540
-----------
Miscellaneous Consumer Services 1.9%
1,488,300 H & R Block Inc.............................................................. 56,555,400
-----------
Printing/Publishing 1.6%
1,141,600 Deluxe Corp.................................................................. 37,815,500
192,900 Dun & Bradstreet Corp........................................................ 11,164,088
-----------
48,979,588
-----------
DURABLES 6.6%
Aerospace 5.9%
459,600 AAR Corp..................................................................... 8,387,700
715,800 Lockheed Corp................................................................ 48,048,075
840,100 Rockwell International Corp.................................................. 39,694,725
63,200 Thiokol Corp................................................................. 2,259,400
904,100 United Technologies Corp..................................................... 79,899,838
-----------
178,289,738
-----------
Automobiles 0.7%
706,800 Dana Corp.................................................................... 20,408,850
-----------
MANUFACTURING 17.1%
Chemicals 4.7%
518,300 Dow Chemical Co.............................................................. 38,613,350
730,400 E.I. du Pont de Nemours & Co................................................. 50,215,000
160,000 Lubrizol Corp................................................................ 5,220,000
1,092,800 Lyondell Petrochemical Co.................................................... 28,276,200
518,900 Union Carbide Corp........................................................... 20,626,275
-----------
142,950,825
-----------
Containers & Paper 1.6%
87,000 Federal Paper Board Co., Inc................................................. 3,338,625
647,700 Kimberly-Clark Corp.......................................................... 43,476,863
-----------
46,815,488
-----------
Diversified Manufacturing 4.0%
1,618,700 Dresser Industries Inc....................................................... 38,646,463
109,100 Honeywell, Inc............................................................... 4,677,663
</TABLE>

The accompanying notes are an integral part of the financial statements.

68
<PAGE>

<TABLE>
<CAPTION>
Market
Shares Value ($)

<S> <C> <C>
292,900 Olin Corp.................................................................... 20,136,875
784,600 TRW Inc...................................................................... 58,354,625
-----------
121,815,626
-----------
Electrical Products 0.8%
377,100 Thomas & Betts Corp.......................................................... 24,370,088
-----------
Machinery/Components/Controls 0.4%
273,500 Timken Co.................................................................... 11,657,938
-----------
Office Equipment/Supplies 2.4%
531,500 Xerox Corp................................................................... 71,420,313
-----------
Specialty Chemicals 2.9%
204,800 ARCO Chemical Co............................................................. 9,984,000
709,000 Betz Laboratories Inc........................................................ 28,980,375
306,400 Petrolite Corp............................................................... 8,426,000
1,145,300 Witco Corp................................................................... 40,228,663
-----------
87,619,038
-----------
Wholesale Distributors 0.3%
102,800 Alco Standard Corp........................................................... 8,660,900
-----------
ENERGY 8.8%
Engineering 0.7%
1,072,900 McDermott International Inc.................................................. 21,189,775
-----------
Oil Companies 6.9%
433,800 Exxon Corp................................................................... 31,342,050
395,300 Murphy Oil Corp.............................................................. 15,812,000
564,500 Pennzoil Co.................................................................. 24,767,438
545,900 Repsol SA (ADR).............................................................. 17,332,325
168,100 Royal Dutch Petroleum Co. (New York shares).................................. 20,634,275
266,600 Societe Nationale Elf Aquitaine.............................................. 17,995,365
373,500 Texaco Inc................................................................... 24,137,438
129,428 Total SA "B"................................................................. 7,834,561
554,825 Total SA (ADR)............................................................... 16,714,103
1,730,000 YPF SA "D" (ADR)............................................................. 31,140,000
-----------
207,709,555
-----------
Oilfield Services/Equipment 1.2%
820,300 Halliburton Co............................................................... 34,247,525
-----------
METALS & MINERALS 0.9%
Precious Metals 0.4%
405,000 De Beers Consolidated Mines Ltd. (ADR)....................................... 11,036,250
-----------
Steel & Metals 0.5%
579,010 Freeport McMoRan Copper & Gold, Inc. "A"..................................... 14,837,131
-----------
TRANSPORTATION 0.9%
Railroads
84,200 Consolidated Rail Corp. 5,788,750
141,100 Norfolk Southern Corp. 10,547,225
152,500 Union Pacific Corp. 10,103,125
-----------
26,439,100
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

69
<PAGE>

AARP GROWTH AND INCOME FUND

<TABLE>
<CAPTION>
Market
Shares Value ($)

UTILITIES 4.7%
Electric Utilities
801,700 CINergy Corp................................................................. 22,347,388
261,200 CMS Energy Corp.............................................................. 6,856,500
1,468,800 China Light & Power Co., Ltd. (ADR).......................................... 7,564,320
52,000 Midlands Electricity PLC (ADR)............................................... 798,570
26,000 Midlands Electricity PLC..................................................... 802,750
250,000 National Power PLC (ADR)..................................................... 3,625,000
553,600 PacifiCorp................................................................... 10,518,400
338,600 Pacific Gas & Electric Co.................................................... 10,115,675
980,000 PowerGen PLC................................................................. 3,839,913
942,503 PowerGen PLC (ADR)........................................................... 14,726,609
1,118,900 Southern Company............................................................. 26,434,013
224,600 Texas Utilities Co., Inc..................................................... 7,832,925
876,100 Unicom Corp.................................................................. 26,502,010
--------------
141,964,073
--------------
TOTAL COMMON STOCKS (COST $2,168,918,812).................................... 2,738,168,191
--------------

SUMMARY % OF NET ASSETS

TOTAL INVESTMENT PORTFOLIO (COST $2,460,026,972) (a)......... 101.1 3,040,229,571
OTHER ASSETS AND LIABILITIES, NET............................ (1.1) (33,710,994)
----- --------------
NET ASSETS................................................... 100.0 3,006,518,577
===== ==============

REIT Real Estate Investment Trust

(a) At September 30, 1995, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $2,458,044,405 was as follows:

Aggregate gross unrealized appreciation for all investments in which
there is an excess of value over tax cost............................................ $ 610,759,077

Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value.................................................. (28,573,911)
--------------
Net unrealized appreciation............................................................ $ 582,185,166
==============
- ------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments) for the year ended
September 30, 1995, aggregated $1,192,461,153 and $759,987,675, respectively.
- ------------------------------------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of
the Fund are comprised of the Fund's investment portfolio, other assets and liabilities. The
percentage of the investment portfolio may be greater or less than 100% due to the inclusion of the
Fund's assets and liabilities in the calculation. The Fund's other assets and liabilities are
disclosed in the Statement of Assets and Liabilities.
</TABLE>

The accompanying notes are an integral part of the financial statements.

70
<PAGE>
AARP CAPITAL GROWTH FUND

LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)

<S> <C>
REPURCHASE AGREEMENTS 2.1%

14,365,000 Repurchase Agreement with State Street Bank and
Trust Company dated 9/29/95 at 6.1% to be
repurchased at $14,372,302 on 10/2/95,
collateralized by a $15,565,000 U.S. Treasury
Bill, 6/27/96 (Cost $14,365,000)......................... 14,365,000
------------

PREFERRED STOCKS 1.3%

Shares
------

Technology
Computer Software
57,000 SAP AG (Cost $8,941,914).................................. 9,281,945
------------
COMMON STOCKS 96.6%

CONSUMER DISCRETIONARY 7.4%
Department & Chain Stores 4.4%
200,000 J.C. Penney Co., Inc...................................... 9,925,000
100,000 Limited Inc............................................... 1,900,000
280,000 May Department Stores..................................... 12,250,000
237,900 Walgreen Co............................................... 6,661,200
------------
30,736,200
------------

Hotels & Casinos 0.6%
174,000 Carnival Corp., Class A................................... 4,176,000
------------
Restaurants 1.2%
210,000 McDonald's Corp........................................... 8,032,500
------------
Specialty Retail 1.2%
300,000 Toys "R" Us Inc.*......................................... 8,100,000
------------

CONSUMER STAPLES 7.2%
Alcohol & Tobacco 1.0%
112,000 Anheuser Busch Companies, Inc............................. 6,986,000
------------
Food & Beverage 2.6%
185,000 Albertson's Inc........................................... 6,313,125
230,000 PepsiCo Inc............................................... 11,730,000
------------
18,043,125
------------
Package Goods/Cosmetics 3.6%
150,000 Clorox Co................................................. 10,706,250
100,000 Colgate-Palmolive Co...................................... 6,662,500
100,000 Procter & Gamble Co....................................... 7,700,000
------------
25,068,750
------------

HEALTH 13.5%
Hospital Management 2.9%
420,000 Columbia/HCA Healthcare Corp.............................. 20,422,500
------------
Medical Supply & Specialty 2.1%

110,000 Becton, Dickinson & Co.................................... 6,916,250
144,000 Medtronic Inc............................................. 7,740,000
------------
14,656,250
------------
Pharmaceuticals 8.5%
115,000 American Home Products Corp............................... 9,760,625
315,000 Astra AB "B" (Free)....................................... 11,086,030
</TABLE>

The accompanying notes are an intregral part of the financial statements.

71
<PAGE>

AARP CAPITAL GROWTH FUND

<TABLE>
<CAPTION>
Market
Shares Value ($)

<S> <C>

170,000 Johnson & Johnson......................................... 12,601,250
250,000 Merck & Co. Inc........................................... 14,000,000
220,000 Schering-Plough Corp...................................... 11,330,000
------------
58,777,905
------------
COMMUNICATIONS 2.6%
Cellular Telephone 1.3%
220,000 Vodafone Group PLC (ADR).................................. 9,020,000
------------
Telephone/Communications 1.3%
100,000 Alltel Corp............................................... 2,987,500
225,000 Tele Danmark A/S (ADR).................................... 5,821,875
------------
8,809,375
------------

FINANCIAL 12.7%
Banks 2.9%
80,000 J.P. Morgan & Co., Inc.................................... 6,190,000
217,300 MBNA Corp................................................. 9,045,113
125,000 NBD Bancorp, Inc.......................................... 4,781,250
------------
20,016,363
------------
Insurance 5.6%
54,000 AMBAC Inc................................................. 2,376,000
180,000 American International Group, Inc......................... 15,300,000
140,000 EXEL, Ltd................................................. 8,137,500
141,000 MBIA Inc.................................................. 9,940,500
62,200 PMI Group, Inc............................................ 2,946,725
------------
38,700,725
------------
Other Financial Companies 4.2%
210,000 Federal National Mortgage Association..................... 21,735,000
140,000 Student Loan Marketing Association........................ 7,560,000
------------
29,295,000
------------

MEDIA 5.8%
Broadcasting & Entertainment 4.8%
110,000 Capital Cities/ABC Inc.................................... 12,938,750
370,000 Time Warner Inc........................................... 14,707,500
90,000 Walt Disney Co............................................ 5,163,750
------------
32,810,000
------------
Cable Television 0.6%
251,789 Tele-Communications Inc. "A" (New)*....................... 4,406,308
------------
Print Media 0.4%
56,000 Gannett Co., Inc.......................................... 3,059,000
------------

SERVICE INDUSTRIES 6.3%
Edp Services 2.9%
140,000 Automatic Data Processing, Inc............................ 9,537,500
137,000 General Motors Corp. "E".................................. 6,233,500
157,600 National Data Corp........................................ 4,235,500
------------
20,006,500
------------
Investment 2.8%
75,000 Dean Witter, Discover & Co................................ 4,218,750
265,000 Franklin Resources Inc.................................... 15,270,625
------------
19,489,375
------------
Printing/Publishing 0.6%
80,000 Reuters Holdings PLC "B" (ADR)............................ 4,230,000
------------
</TABLE>

The accompanying notes are an intregral part of the financial statements.

72
<PAGE>

<TABLE>
<CAPTION>
Market
Shares Value ($)

<S> <C>

DURABLES 5.7%
Aerospace 2.6%
185,000 Rockwell International Corp............................... 8,741,250
100,000 United Technologies Corp.................................. 8,837,500
------------
17,578,750
------------
Automobiles 0.6%
140,000 Ford Motor Co............................................. 4,357,500
------------
Telecommunications Equipment 1.6%
125,000 General Instrument Corp.*................................. 3,750,000
106,000 Nokia (AB) Oy "A"......................................... 7,436,770
------------
11,186,770
------------
Tires 0.9%
260,000 Cooper Tire & Rubber Co................................... 6,305,000
------------

MANUFACTURING 8.1%
Chemicals 2.1%
140,000 E.I. du Pont de Nemours & Co.............................. 9,625,000
100,000 Sigma-Aldrich Corp........................................ 4,850,000
------------
14,475,000
------------
Diversified Manufacturing 1.9%
190,000 Dover Corp................................................ 7,267,500
95,000 General Electric Co....................................... 6,056,250
------------
13,323,750
------------
Electrical Products 2.8%
83,000 Emerson Electric Co....................................... 5,934,500
275,000 Philips NV (New York shares).............................. 13,406,250
------------
19,340,750
------------
Machinery/Components/Controls 1.3%
225,000 Parker-Hannifin Group..................................... 8,550,000
------------

TECHNOLOGY 13.6%
Computer Software 0.7%
120,000 Oracle Systems Corp.*..................................... 4,605,000
------------
Diverse Electronic Products 1.7%
80,000 General Motors Corp. "H".................................. 3,280,000
110,100 Motorola Inc.............................................. 8,408,887
------------
11,688,887
------------
Electronic Components/Distributors 0.0%
71 Samsung Electronics Co., Ltd. (New)*...................... 17,031
------------
Electronic Data Processing 4.7%
120,000 Compaq Computers Corp.* 5,805,000
250,000 Hewlett-Packard Co........................................ 20,843,750
60,000 International Business Machines Corp...................... 5,662,500
------------
32,311,250
------------
Military Electronics 0.5%
57,700 Loral Corp................................................ 3,288,900
------------
Office/Plant Automation 2.8%
200,000 3Com Corp.*............................................... 9,100,000
100,000 Cabletron Systems Inc.*................................... 6,587,500
60,000 Cisco Systems, Inc.*...................................... 4,140,000
------------
19,827,500
------------
</TABLE>

The accompanying notes are an intregral part of the financial statements.

73
<PAGE>

AARP CAPITAL GROWTH FUND

Market
Shares Value ($)

<S> <C>

Semiconductors 3.2%
190,000 Intel Corp................................................ 11,423,750
136,000 Texas Instruments Inc..................................... 10,863,000
------------
22,286,750
------------

ENERGY 8.2%
Engineering 0.3%
40,000 Fluor Corp................................................ 2,240,000
------------
Oil Companies 7.0%

200,000 Amoco Corp................................................ 12,825,000
155,000 Exxon Corp................................................ 11,198,750
90,000 Mobil Corp................................................ 8,966,250
329,800 Repsol SA (ADR)........................................... 10,471,150
164,620 Total SA (ADR)............................................ 4,959,178
------------
48,420,328
------------
Oil/Gas Transmission 0.9%
185,000 Enron Corp................................................ 6,197,500
------------

METALS & MINERALS 0.4%
Steel & Metals
55,700 Nucor Corp................................................ 2,492,575
------------

TRANSPORTATION 0.7%
Railroads
70,000 Conrail Inc............................................... 4,812,500
------------

UTILITIES 4.4%
Electric Utilities
145,500 Destec Energy Inc.*....................................... 2,182,500
250,000 Eastern Utilities Association............................. 6,062,500
115,000 Houston Industries Inc.................................... 5,074,375
60,000 Illinova Corp............................................. 1,627,500
150,000 NIPSCO Industries Inc..................................... 5,231,250
285,000 PowerGen PLC (ADR)........................................ 4,453,125
250,000 Southern Company.......................................... 5,906,250
------------
30,537,500
-----------
Total Common Stocks (Cost $527,309,541) 668,685,117
------------

SUMMARY % OF NET ASSETS
<S> <C>
Total Investment Portfolio
(Cost $550,616,455) (a).................... 100.0 692,332,062
Other Assets and Liabilities, Net........... 0.0 (323,116)
----- ------------
Net Assets.................................. 100.0 692,008,946
===== ============
</TABLE>

* Nonincome producing security.

(a) At September 30, 1995, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $550,780,726 was
as follows:

<TABLE>

<S> <C>

Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost....................... $146,000,179
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value....................... (4,448,843)
------------
Net unrealized appreciation............................................... $141,551,336
============
</TABLE>
- -------------------------------------------------------------------------------
Purchases and sales of investment securities, (excluding short-term
investments), for the year ended September 30, 1995, aggregated
$624,892,455 and $726,800,851, respectively.
- -------------------------------------------------------------------------------

The accompanying notes are an intregral part of the financial statements.

<PAGE>
F I N A N C I A L S T A T E M E N T S

STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
AARP HIGH AARP HIGH AARP GNMA
QUALITY QUALITY TAX FREE AND U.S.
MONEY FUND MONEY FUND TREASURY FUND
SEPTEMBER 30, 1995

<S> <C> <C> <C>
ASSETS
Investments, at value (for identified cost, see
accompanying lists of investment portfolios)..... $381,262,371 $118,781,440 $5,214,219,079
Cash............................................... 381,647 219,378 663,929
Other receivables:
Investments sold................................. -- 300,000 --
Dividends and interest........................... 2,430,709 638,028 53,560,790
Fund shares sold................................. 1,099,254 42,259 1,146,927
Daily variation margin on open futures
contracts (Note 1)............................. -- -- --
Unrealized appreciation on forward currency
exchange contracts (Notes 1 and 3)............... -- -- --
Deferred organization expenses (Note 1)............ -- -- --
Other assets....................................... 3,624 1,214 52,856
------------ ------------ --------------
Total assets..................................... 385,177,605 119,982,319 5,269,643,581
====================================================================================================
LIABILITIES
Payables:
Due to custodian bank............................ -- -- --
Investments purchased............................ -- -- --
Fund shares redeemed............................. 795,573 67,840 2,067,973
Dividends........................................ 148,656 57,996 12,318,900
Management fee (Note 2).......................... 125,856 38,987 1,793,374
Transfer and dividend disbursing agent (Note 2).. 124,661 26,654 633,351
Daily variation margin on open futures
contracts (Note 1)............................... -- -- --
Other accrued expenses............................. 86,807 44,871 779,509
------------ ------------ -------------
Total liabilities.................................. 1,281,553 236,348 17,593,107
===================================================================================================
Net assets at value.............................. $ 383,896,052 $119,745,971 $5,252,050,474
===================================================================================================
NET ASSETS CONSIST OF:
Accumulated undistributed net investment
income........................................... $ -- $ -- $ --
Net unrealized appreciation (depreciation) on:
Investments...................................... (490,715) -- 114,656,462
Futures contracts................................ -- -- --
Foreign currency related transactions............ -- -- --
Accumulated net realized capital gain (loss)....... (66,921) (1,226,724) (359,297,259)
Shares of beneficial interest, at par.............. 3,843,894 119,753 3,458,291
Additional paid-in capital......................... 380,609,794 120,852,942 5,493,232,980
===================================================================================================
Net assets at value................................ $ 383,896,052 $119,745,971 $5,252,050,474
===================================================================================================
Shares of beneficial interest outstanding,
$.01 par value, unlimited number of shares
authorized. (Note) AARP High Quality Tax
Free Money Fund has a $.001 par value............ 384,389,361 119,753,010 345,829,087
===================================================================================================
Net asset value, offering and redemption price
per share (net assets at value, per fund,
divided by the respective shares of beneficial
interest outstanding)............................ $1.00 $1.00 $15.19
===================================================================================================

</TABLE>

The accompanying notes are an integral part of the financial statements.

76
<PAGE>

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
AARP HIGH AARP INSURED AARP BALANCED
QUALITY TAX FREE GENERAL STOCK AND BOND
SEPTEMBER 30, 1995 BOND FUND BOND FUND FUND
<S> <C> <C> <C>

ASSETS
Investments, at value (for identified cost, see
accompanying lists of investment portfolios)............ $529,380,919 $1,784,155,534 $ 245,971,020
Cash...................................................... 1,577 270,125 2,339
Other receivables:
Investments sold........................................ -- 4,064,000 333,734
Dividends and interest.................................. 5,387,454 23,943,866 1,448,175
Fund shares sold........................................ 60,877 1,232,924 287,668
Daily variation margin on open futures
contracts (Note 1).................................... -- -- 22,688
Unrealized appreciation on forward currency
exchange contracts (Notes 1 and 3)...................... -- -- 159,340
Deferred organization expenses (Note 1)................... -- -- 29,735
Other assets.............................................. 1,969 9,769 --
------------ -------------- --------------
Total assets............................................ $534,832,796 1,813,676,218 248,254,699
============ ============== ==============
LIABILITIES
Payables:
Due to custodian bank................................... -- -- --
Investments purchased................................... -- -- 522,234
Fund shares redeemed.................................... 212,670 553,182 235,042
Dividends............................................... 745,687 2,864,813 --
Management fee (Note 2)................................. 212,336 725,373 96,579
Transfer and dividend disbursing agent (Note 2)......... 133,141 166,466 46,657
Daily variation margin on open futures
contracts (Note 1)...................................... -- 2,062,500 --
Other accrued expenses 106,665 256,562 147,232
------------ -------------- --------------
Total liabilities......................................... 1,410,499 6,628,896 1,047,744
============ ============== ==============
Net assets at value..................................... $533,422,297 $1,807,047,322 $ 247,206,955
============ ============== ==============
NET ASSETS CONSIST OF:
Accumulated undistributed net investment
income.................................................. $ 304,913 $ -- $ 321,966
Net unrealized appreciation (depreciation) on:
Investments............................................. 3,274,381 80,036,981 21,075,094
Futures contracts....................................... -- (629,889) (3,391)
Foreign currency related transactions................... -- -- 159,949
Accumulated net realized capital gain (loss).............. (10,285,791) (28,924,305) 2,055,572
Shares of beneficial interest, at par..................... 333,124 1,018,727 150,746
Additional paid-in capital................................ 539,795,670 1,755,545,808 223,447,019
============ ============== ==============
Net assets at value....................................... $533,422,297 $1,807,047,322 $ 247,206,955
============ ============== ==============

Shares of beneficial interest outstanding,
$.01 par value, unlimited number of shares
authorized. (Note) AARP High Quality Tax
Free Money Fund has a $.001 par value................... 33,312,382 101,872,699 15,074,610
============= ============== ================
Net asset value, offering and redemption price
per share (net assets at value, per fund,
divided by the respective shares of beneficial
interest outstanding)................................... $16.01 $17.74 $16.40
============ ============== ================
</TABLE>
<TABLE>
<CAPTION>

AARP GROWTH AARP CAPITAL
AND INCOME GROWTH
SEPTEMBER 30, 1995 FUND FUND
<S> <C> <C>
ASSETS
Investments, at value (for identified cost, see
accompanying lists of investment portfolios)............ $3,040,229,571 $692,332,062
Cash...................................................... 1,092,801 --
Other receivables:
Investments sold........................................ 6,963,876 1,320,710
Dividends and interest.................................. 9,232,845 699,334
Fund shares sold........................................ 25,725 --
Daily variation margin on open futures
contracts (Note 1).................................... -- --
Unrealized appreciation on forward currency
exchange contracts (Notes 1 and 3)...................... -- --
Deferred organization expenses (Note 1)................... -- --
Other assets.............................................. 4,287 --
-------------- ------------
Total assets............................................ $3,057,549,105 $694,352,106
============== ============
LIABILITIES
Payables:
Due to custodian bank................................... -- 106,750
Investments purchased................................... 49,038,772 1,625,475
Fund shares redeemed.................................... -- --
Dividends............................................... -- --
Management fee (Note 2)................................. 1,179,826 346,582
Transfer and dividend disbursing agent (Note 2)......... 277,544 91,070
Daily variation margin on open futures
contracts (Note 1)...................................... -- --
Other accrued expenses.................................... 534,386 173,283
-------------- ------------
Total liabilities......................................... 51,030,528 2,343,160
============== ============
Net assets at value..................................... $3,006,518,577 $692,008,946
============== ============
NET ASSETS CONSIST OF:
Accumulated undistributed net investment
income.................................................. $ 6,072,468 $ 6,365,346
Net unrealized appreciation (depreciation) on:
Investments............................................. 580,202,599 141,715,607
Futures contracts....................................... -- --
Foreign currency related transactions................... 5,828 (4,789)
Accumulated net realized capital gain (loss).............. 52,570,066 3,733,920
Shares of beneficial interest, at par..................... 783,717 180,420
Additional paid-in capital................................ 2,366,883,899 540,018,442
============== ============
Net assets at value....................................... $3,006,518,577 $692,008,946
============== ============

Shares of beneficial interest outstanding,
$.01 par value, unlimited number of shares
authorized. (Note) AARP High Quality Tax
Free Money Fund has a $.001 par value................... 78,371,684 18,041,977
=============================
Net asset value, offering and redemption price
per share (net assets at value, per fund,
divided by the respective shares of beneficial
interest outstanding)................................... $38.36 $38.36
==============================
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

Financial Statements

STATEMENT OF OPERATIONS

AARP HIGH AARP HIGH AARP GNMA
QUALITY QUALITY TAX FREE AND U.S.
YEAR ENDED SEPTEMBER 30, 1995 MONEY FUND MONEY FUND TREASURY FUND
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME:
Interest...................................................... $21,982,820 $4,785,487 $393,260,749
Dividends..................................................... -- -- --
----------- ---------- ------------
21,982,820 4,785,487 393,260,749
Less foreign taxes withheld................................... -- -- --
----------- ---------- ------------
21,982,820 4,785,487 393,260,749
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Management fee (Note 2)....................................... 1,492,545 493,693 22,095,173
Services to shareholders:
Transfer and dividend disbursing expense (Note 2)..... 1,533,555 347,016 8,104,169
Other expenses........................................ 210,373 63,566 1,443,896
Trustees' fees and expenses (Note 2).......................... 19,837 30,610 29,332
Shareholder communications.................................... 199,986 54,036 2,052,542
Legal......................................................... 13,059 344 26,270
Auditing...................................................... 25,482 26,500 66,799
Custodian and accounting fees (Note 2)........................ 80,914 52,202 1,083,056
Registration expenses......................................... 76,878 18,630 85,342
Amortization of organization expenses (Note 1)................ -- -- --
Other......................................................... 13,774 7,697 184,075
----------- ---------- ------------
Total Expenses........................................................ 3,666,403 1,094,294 35,170,654
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income................................................. 18,316,417 3,691,193 358,090,095
- -------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from:
Investments........................................... (2,594) (5,140) (68,679,536)
Futures contracts (Note 1)............................ -- -- --
Foreign currency related transactions (Note 1)........ -- -- --
Net unrealized appreciation (depreciation) on:
Investments........................................... (235,013) -- 224,571,191
Futures contracts..................................... -- -- --
Foreign currency related transactions................. -- -- --
----------- ---------- ------------
Net gain (loss) on investments........................................ (237,607) (5,140) 155,891,655
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations............................................... $18,078,810 $3,686,053 $513,981,750
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

78
<PAGE>
<TABLE>
<CAPTION>
AARP HIGH AARP INSURED AARP BALANCED
QUALITY TAX FREE GENERAL STOCK AND BOND
BOND FUND BOND FUND FUND
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME:
Interest............................................. $37,753,441 $103,897,620 $ 6,141,535
Dividends............................................ -- -- 3,988,384
----------- ------------ -----------
37,753,441 103,897,620 10,129,919
Less foreign taxes withheld.......................... -- -- (37,101)
----------- ------------ -----------
37,753,441 103,897,620 10,092,818
- -----------------------------------------------------------------------------------------------------------
EXPENSES:
Management fee (Note 2).............................. 2,600,629 8,813,051 960,412
Services to shareholders:
Transfer and dividend disbursing expense (Note 2).. 1,720,303 2,148,893 513,031
Other expenses..................................... 206,214 366,879 120,197
Trustees' fees and expenses (Note 2)................. 31,055 30,826 23,992
Shareholder communications........................... 271,351 436,821 124,209
Legal................................................ 1,508 49,933 5,079
Auditing............................................. 48,340 57,863 19,538
Custodian and accounting fees (Note 2)............... 122,478 293,635 97,877
Registration expenses................................ 34,937 58,448 97,922
Amortization of organization expenses (Note 1)....... -- -- 7,315
Other................................................ 21,135 125,346 12,559
----------- ------------ -----------
Total Expenses......................................... 5,057,950 12,381,695 1,982,131
- -----------------------------------------------------------------------------------------------------------
Net investment income.................................. 32,695,491 91,515,925 8,110,687
- -----------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from:
Investments........................................ 6,264,433 1,141,498 2,922,966
Futures contracts (Note 1)......................... 462,444 (22,927,127) 66,437
Foreign currency related transactions (Note 1)..... -- -- (8,944)
Net unrealized appreciation (depreciation) on:
Investments........................................ 25,349,000 102,468,526 20,344,202
Futures contracts.................................. (235,464) (843,714) (3,391)
Foreign currency related transactions.............. -- -- 159,949
----------- ------------ -----------
Net gain (loss) on investments......................... 31,840,413 79,839,183 23,481,219
- -----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations...................................... $64,535,904 $171,355,108 $31,591,906
- -----------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
AARP GROWTH AARP CAPITAL
AND INCOME GROWTH
FUND FUND
<S> <C> <C>
INVESTMENT INCOME
INCOME:
Interest............................................. $ 10,888,172 $ 1,251,177
Dividends............................................ 91,816,143 11,484,726
------------ ------------
102,704,315 12,735,903
Less foreign taxes withheld.......................... (1,007,072) (139,552)
------------ ------------
101,697,243 12,596,351
- ----------------------------------------------------------------------------------------
EXPENSES:
Management fee (Note 2).............................. 12,406,325 3,988,023
Services to shareholders:
Transfer and dividend disbursing expense (Note 2).. 3,249,295 1,171,702
Other expenses..................................... 873,891 291,103
Trustees' fees and expenses (Note 2)................. 28,774 28,697
Shareholder communications........................... 1,036,474 355,297
Legal................................................ 17,001 7,389
Auditing............................................. 46,913 44,057
Custodian and accounting fees (Note 2)............... 396,036 164,779
Registration expenses................................ 252,079 64,893
Amortization of organization expenses (Note 1)....... -- --
Other................................................ 102,424 31,422
------------ ------------
Total Expenses......................................... 18,409,212 6,147,362
- ----------------------------------------------------------------------------------------
Net investment income.................................. 83,288,031 6,448,989
- ----------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from:
Investments........................................ 82,525,735 3,854,142
Futures contracts (Note 1)......................... -- --
Foreign currency related transactions (Note 1)..... 23,310 (49,230)
Net unrealized appreciation (depreciation) on:
Investments........................................ 331,251,054 124,391,488
Futures contracts.................................. -- --
Foreign currency related transactions.............. 5,828 (4,789)
------------ ------------
Net gain (loss) on investments......................... 413,805,927 128,191,611
- ----------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations...................................... $497,093,958 $134,640,600
- ----------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

FINANCIAL STATEMENTS

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
AARP HIGH AARP HIGH
QUALITY QUALITY TAX FREE
MONEY FUND MONEY FUND

INCREASE (DECREASE) IN NET ASSETS:
Years Ended Years Ended
Sept. 30, Sept. 30,
1995 1994 1995 1994
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Operations:
Net investment income......................... $ 18,316,417 $ 8,576,806 $ 3,691,193 $ 2,330,435
Net realized gain (loss) from:
Investments................................. (2,594) - (5,140) (10,344)
Futures contracts........................... - - - -
Option contracts............................ - - - -
Foreign currency related
transactions.............................. - - - -
Net unrealized appreciation
(depreciation) on:
Investments................................. (235,013) (551,482) - -
Futures contracts........................... - - - -
Foreign currency related
transactions.............................. - - - -
------------- ------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations..................... 18,078,810 8,025,324 3,686,053 2,320,091
------------- ------------- ------------ ------------
Distributions to shareholders:
Net investment income......................... (18,316,417) (8,576,806) (3,691,193) (2,330,435)
Net realized gains............................ - - - -
In excess of net realized gains............... - - - -
Tax return of capital......................... - - - -
------------- ------------- ------------ ------------
(18,316,417) (8,576,806) (3,691,193) (2,330,435)
------------- ------------- ------------ ------------
Fund share transactions:

Proceeds from sale of shares.................. 405,381,235 457,195,131 41,129,795 72,891,766

Net asset value of shares issued to
shareholders in reinvestment of
distributions............................... 16,274,697 7,471,832 2,929,152 1,833,452

Cost of shares redeemed....................... (370,960,332) (384,553,352) (53,717,481) (78,946,046)
------------- ------------- ------------ ------------
Net increase (decrease) in net assets
from Fund share transactions.................. 50,695,600 80,113,611 (9,658,534) (4,220,828)
------------- ------------- ------------ ------------
Increase (decrease) in net assets............... 50,457,993 79,562,129 (9,663,674) (4,231,172)
Net assets at beginning of period............... 333,438,059 253,875,930 129,409,645 133,640,817
- ----------------------------------------------------------------------------------------------------------------
Net assets at end of period (a)................. $ 383,896,052 $ 333,438,059 $119,745,971 $129,409,645
- ----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
Shares outstanding at beginning
of period..................................... 333,693,761 253,580,150 129,411,544 133,632,372
------------- ------------- ------------ ------------
Shares sold................................... 405,381,235 457,195,131 41,129,795 72,891,766
Shares issued to shareholders in
reinvestment of distributions.............. 16,274,697 7,471,832 2,929,152 1,833,452
Shares redeemed............................... (370,960,332) (384,553,352) (53,717,481) (78,946,046)
------------- ------------- ------------ ------------
Net increase (decrease) in
Fund shares................................... 50,695,600 80,113,611 (9,658,534) (4,220,828)
------------- ------------- ------------ ------------
Shares outstanding at end of period............. 384,389,361 333,693,761 119,753,010 129,411,544
- ----------------------------------------------------------------------------------------------------------------
(a) Includes accumulated undistributed
net investment income..................... $ - $ - $ - $ -

(b) Commencement of Operations
</TABLE>

<TABLE>
<CAPTION>
AARP GNMA
AND U.S.
TREASURY FUND

INCREASE (DECREASE) IN NET ASSETS:
Years Ended
Sept. 30,
1995 1994
--------------- ---------------
<S> <C> <C>
Operations:
Net investment income......................... $ 358,090,095 $ 377,835,579
Net realized gain (loss) from:
Investments................................. (68,679,536) (301,854,645)
Futures contracts........................... - -
Option contracts............................ - (2,842,351)
Foreign currency related
transactions.............................. - -
Net unrealized appreciation
(depreciation) on:
Investments................................. 224,571,191 (194,039,955)
Futures contracts........................... - -
Foreign currency related
transactions.............................. - -
--------------- ---------------
Net increase (decrease) in net assets
resulting from operations..................... 513,981,750 (120,901,372)
--------------- ---------------
Distributions to shareholders:
Net investment income......................... (347,262,513) (377,835,579)
Net realized gains............................ - -
In excess of net realized gains............... - -
Tax return of capital......................... (10,827,582) -
--------------- ---------------
................................................ (358,090,095) (377,835,579)
--------------- ---------------
Fund share transactions:

Proceeds from sale of shares.................. 313,574,493 767,903,410

Net asset value of shares issued to
shareholders in reinvestment of
distributions............................... 209,361,883 243,322,806

Cost of shares redeemed....................... (1,012,262,747) (1,639,307,179)
--------------- ---------------
Net increase (decrease) in net assets
from Fund share transactions.................. (489,326,371) (628,080,963)
--------------- ---------------
Increase (decrease) in net assets............... (333,434,716) (1,126,817,914)
Net assets at beginning of period............... 5,585,485,190 6,712,303,104
- ------------------------------------------------------------------------------------
Net assets at end of period (a)................. $ 5,252,050,474 $ 5,585,485,190
- ------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
Shares outstanding at beginning
of period..................................... 379,121,168 420,695,404
--------------- ---------------
Shares sold................................... 21,222,249 49,495,268
Shares issued to shareholders in
reinvestment of distributions.............. 14,034,160 15,901,711
Shares redeemed............................... (68,548,490) (106,971,215)
--------------- ---------------
Net increase (decrease) in
Fund shares................................... (33,292,081) (41,574,236)
--------------- ---------------
Shares outstanding at end of period............. 345,829,087 379,121,168
- ------------------------------------------------------------------------------------
(a) Includes accumulated undistributed
net investment income..................... $ - $ -

(b) Commencement of Operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

80
<PAGE>

FINANCIAL STATEMENTS

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
AARP HIGH AARP INSURED
QUALITY TAX FREE GENERAL
BOND FUND BOND FUND

INCREASE (DECREASE) IN NET ASSETS:

Years Ended Years Ended
Sept. 30, Sept. 30,
1995 1994 1995 1994
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income......................... $ 32,695,491 $ 32,320,652 $ 91,515,925 $ 98,275,887
Net realized gain (loss) from:
Investments................................. 6,264,433 (12,214,126) 1,141,498 (782,787)
Futures contracts........................... 462,444 1,131,998 (22,927,127) 5,547,043
Option contracts............................ - - - -
Foreign currency related
transactions.............................. - - - -
Net unrealized appreciation
(depreciation) on:
Investments................................. 25,349,000 (56,963,191) 102,468,526 (198,675,783)
Futures contracts........................... (235,464) 163,838 (843,714) 119,639
Foreign currency related
transactions.............................. - - - -
------------- ------------ ------------- --------------
Net increase (decrease) in net assets
resulting from operations..................... 64,535,904 (35,560,829) 171,355,108 (95,516,001)
------------- ------------ ------------- --------------
Distributions to shareholders:
Net investment income......................... (32,238,660) (32,320,652) (91,515,925) (98,275,887)
Net realized gains............................ - - - (38,761,058)
In excess of net realized gains............... - (13,990,833) - (6,584,253)
Tax return of capital......................... - - - -
------------- ------------ ------------- --------------
(32,238,660) (46,311,485) (91,515,925) (143,621,198)
------------- ------------ ------------- --------------
Fund share transactions:

Proceeds from sale of shares.................. 38,133,943 168,940,806 128,807,008 384,083,220

Net asset value of shares issued to
shareholders in reinvestment of
distributions............................... 22,872,960 34,534,021 56,102,941 97,111,633

Cost of shares redeemed....................... (127,867,757) (157,452,199) (371,972,763) (414,495,879)
------------- ------------ ------------- --------------
Net increase (decrease) in net assets
from Fund share transactions.................. (66,860,854) 46,022,628 (187,062,814) 66,698,974
------------- ------------ ------------- --------------
Increase (decrease) in net assets............... (34,563,610) (35,849,686) (107,223,631) (172,438,225)
Net assets at beginning of period............... 567,985,907 603,835,593 1,914,270,953 2,086,709,178
- ---------------------------------------------------------------------------------------------------------------------
Net assets at end of period (a)................. $ 533,422,297 $ 567,985,907 $1,807,047,322 $1,914,270,953
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
Shares outstanding at beginning
of period..................................... 37,734,181 35,123,046 113,066,680 109,849,454
------------- ------------ ------------- --------------
Shares sold................................... 2,475,377 10,342,361 7,482,591 21,237,027
Shares issued to shareholders in
reinvestment of distributions.............. 1,481,640 2,141,000 3,261,074 5,382,600
Shares redeemed............................... (8,378,816) (9,872,226) (21,937,646) (23,402,401)
------------- ------------ ------------- --------------
Net increase (decrease) in
Fund shares................................... (4,421,799) 2,611,135 (11,193,981) 3,217,226
------------- ------------ ------------- --------------
Shares outstanding at end of period............. 33,312,382 37,734,181 101,872,699 113,066,680
- ---------------------------------------------------------------------------------------------------------------------
(a) Includes accumulated undistributed
net investment income..................... $ 304,913 $ - $ - $ -

(b) Commencement of Operations
</TABLE>

<TABLE>
<CAPTION>
AARP BALANCED AARP GROWTH
STOCK AND BOND AND INCOME
FUND FUND

INCREASE (DECREASE) IN NET ASSETS:
For the Period
Year Ended February 1, Years Ended
September 30, 1994 (b) to Sept. 30,
1995 Sept. 30, 1994 1995 1994
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income......................... $ 8,110,687 $ 2,679,894 $ 83,288,031 $ 58,944,890
Net realized gain (loss) from:
Investments................................. 2,922,966 (481,337) 82,525,735 54,940,316
Futures contracts........................... 66,437 - - -
Option contracts............................ - - - -
Foreign currency related
transactions.............................. (8,944) 56,480 23,310 (92,431)
Net unrealized appreciation
(depreciation) on:
Investments................................. 20,344,202 730,892 331,251,054 38,962,776
Futures contracts........................... (3,391) - - -
Foreign currency related
transactions.............................. 159,949 - 5,828 -
------------ ------------ -------------- --------------
Net increase (decrease) in net assets
resulting from operations..................... 31,591,906 2,985,929 497,093,958 152,755,551
------------ ------------ -------------- --------------
Distributions to shareholders:
Net investment income......................... (7,923,700) (2,565,619) (81,086,105) (66,829,027)
Net realized gains............................ (479,306) - (85,015,819) (11,016,834)
In excess of net realized gains............... - - - -
Tax return of capital......................... - - - -
------------ ------------ -------------- --------------
(8,403,006) (2,565,619) (166,101,924) (77,845,861)
------------ ------------ -------------- --------------
Fund share transactions:

Proceeds from sale of shares.................. 82,046,020 190,243,552 589,883,371 915,359,577

Net asset value of shares issued to
shareholders in reinvestment of
distributions............................... 7,595,827 970,439 149,554,221 57,428,013

Cost of shares redeemed....................... (41,121,662) (16,137,931) (376,048,965) (295,649,512)
------------ ------------ -------------- --------------
Net increase (decrease) in net assets
from Fund share transactions.................. 48,520,185 175,076,060 363,388,627 677,138,078
------------ ------------ -------------- --------------
Increase (decrease) in net assets............... 71,709,085 175,496,370 694,380,661 752,047,768
Net assets at beginning of period............... 175,497,870 1,500 2,312,137,916 1,560,090,148
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of period (a)................. $247,206,955 $175,497,870 $3,006,518,577 $2,312,137,916
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
Shares outstanding at beginning
of period..................................... 11,983,629 100 67,740,274 47,404,023
------------ ------------ -------------- --------------
Shares sold................................... 5,336,478 13,025,672 17,103,571 27,412,953
Shares issued to shareholders in
reinvestment of distributions.............. 497,020 67,628 4,523,324 1,732,575
Shares redeemed............................... (2,742,517) (1,109,771) (10,995,485) (8,809,277)
------------ ------------ -------------- --------------
Net increase (decrease) in
Fund shares................................... 3,090,981 11,983,529 10,631,410 20,336,251
------------ ------------ -------------- --------------
Shares outstanding at end of period............. 15,074,610 11,983,629 78,371,684 67,740,274
- --------------------------------------------------------------------------------------------------------------------
(a) Includes accumulated undistributed
net investment income..................... $ 321,966 $ 142,595 $ 6,072,468 $ 4,044,032

(b) Commencement of Operations
</TABLE>

<TABLE>
<CAPTION>
AARP CAPITAL
GROWTH
FUND

INCREASE (DECREASE) IN NET ASSETS:

Years Ended
Sept. 30,
1995 1994
------------- -------------
<S> <C> <C>
Operations:
Net investment income......................... $ 6,448,989 $ 120,099
Net realized gain (loss) from:
Investments................................. 3,854,142 17,135,778
Futures contracts........................... - -
Option contracts............................ - -
Foreign currency related
transactions.............................. (49,230) 2,595
Net unrealized appreciation
(depreciation) on:
Investments................................. 124,391,488 (53,012,292)
Futures contracts........................... - -
Foreign currency related
transactions.............................. (4,789) -
------------- -------------
Net increase (decrease) in net assets
resulting from operations..................... 134,640,600 (35,753,820)
------------- -------------
Distributions to shareholders:
Net investment income......................... (216,094) (916,825)
Net realized gains............................ (13,160,374) (53,175,158)
In excess of net realized gains............... - -
Tax return of capital......................... - -
------------- -------------
(13,376,468) (54,091,983)
------------- -------------
Fund share transactions:

Proceeds from sale of shares.................. 68,276,671 277,949,808

Net asset value of shares issued to
shareholders in reinvestment of
distributions............................... 12,786,953 51,627,257

Cost of shares redeemed....................... (193,118,723) (164,072,900)
------------- -------------
Net increase (decrease) in net assets
from Fund share transactions.................. (112,055,099) 165,504,165
------------- -------------
Increase (decrease) in net assets............... 9,209,033 75,658,362
Net assets at beginning of period............... 682,799,913 607,141,551
- --------------------------------------------------------------------------------
Net assets at end of period (a)................. $ 692,008,946 $ 682,799,913
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
Shares outstanding at beginning
of period..................................... 21,513,985 16,773,892
------------- -------------
Shares sold................................... 2,055,946 8,230,221
Shares issued to shareholders in
reinvestment of distributions.............. 424,681 1,522,034
Shares redeemed............................... (5,952,635) (5,012,162)
------------- -------------
Net increase (decrease) in
Fund shares................................... (3,472,008) 4,740,093
------------- -------------
Shares outstanding at end of period............. 18,041,977 21,513,985
- --------------------------------------------------------------------------------
(a) Includes accumulated undistributed
net investment income..................... $ 6,365,346 $ 122,688

(b) Commencement of Operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

81
<PAGE>
FINANCIAL HIGHLIGHTS

AARP HIGH QUALITY MONEY FUND

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------------------------------------------------
Net investment income (a)................................ .049 .028 .021 .040 .060
Distributions from net investment income................. (.049) (.028) (.021) (.040)(b) (.060)
------------------------------------------------------
Net asset value, end of period............................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------------------------------------------------
Total Return (%) (c)....................................... 4.99 2.84 2.13 4.12 6.22
Ratios and Supplemental Data
Net assets, end of period ($ millions)..................... 384 333 254 323 357
Ratio of operating expenses to average net assets (%)(a)... .978 1.125 1.312 1.151 1.053
Ratio of net investment income to average net assets (%)... 4.887 2.889 2.123 3.613 6.050
(a) Reflects a per share reimbursement of expenses
during the period by the Fund Manager of: $ -- $ -- $ -- $ .000 $ .001
(b) Includes approximately $.005 per share of net realized
short-term capital gains.
(c) Total returns would have been lower had certain expenses not been reduced.
</TABLE>

AARP HIGH QUALITY TAX FREE MONEY FUND

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------
1995 1994 1993 1992 1991(b)
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ .996
---------------------------------------------------
Income from investment operations:
Net investment income (a).................................. .029 .017 .016 .026 .055
Net realized and unrealized gain on investments............ -- -- -- -- .004
---------------------------------------------------
Total from investment operations............................. .029 .017 .016 .026 .059
---------------------------------------------------
Less distributions from net investment income................ (.029) (.017) (.016) (.026) (.055)
---------------------------------------------------
Net asset value, end of period............................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------------------------------------------------
Total Return (%) (c)......................................... 2.99 1.76 1.62 2.58 6.10
Ratios and Supplemental Data
Net assets, end of period ($ millions)....................... 120 129 134 127 119
Ratio of operating expenses to average net assets (%) (a).... .87 .90 .93 .95 1.06
Ratio of net investment income to average net assets (%)..... 2.94 1.75 1.60 2.54 5.43
(a) Reflects a per share reimbursement of expenses
during the period by the Fund Manager of:................ $ -- $ .000 $ .002 $ .002 $ .001

(b) On August 1, 1991 the Fund implemented a 15.17 to 1.00 stock split and
adopted its present name and investment objectives. Prior to that date, the
Fund was known as the AARP Insured Tax Free Short Term Fund. Financial
Highlights, for the year ended September 30, 1991, have been restated to
reflect the stock split and should not be considered representative of the
present Fund.

82
<PAGE>
AARP GNMA AND U.S. TREASURY FUND

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period......................... $ 14.73 $ 15.96 $ 16.19 $ 15.72 $ 14.95
---------------------------------------------------
Income from investment operations:
Net investment income...................................... 1.01 .93 1.15 1.22 1.26
Net realized and unrealized gain (loss) on investments..... 0.46 (1.23) (.23) .47 .77
---------------------------------------------------
Total from investment operations............................. 1.47 (.30) .92 1.69 2.03
---------------------------------------------------
Less distributions:
Net investment income...................................... (.98) (.93) (1.15) (1.22) (1.26)
Tax return of capital...................................... (.03) -- -- -- --
---------------------------------------------------
Total distributions........................................ (1.01) (.93) (1.15) (1.22) (1.26)
---------------------------------------------------
Net asset value, end of period............................... $ 15.19 $ 14.73 $ 15.96 $ 16.19 $ 15.72
---------------------------------------------------
Total Return (%)............................................. 10.31 (1.90) 5.89 11.19 14.12
Ratios and Supplemental Data
Net assets, end of period ($ millions)....................... 5,252 5,585 6,712 5,232 3,311
Ratio of operating expenses to average net assets (%)........ .67 .66 .70 .72 .74
Ratio of net investment income to average net assets (%)..... 6.77 6.09 7.15 7.69 8.23
Portfolio turnover rate (%).................................. 70.35 114.54 105.49 74.33 86.64
</TABLE>

AARP HIGH QUALITY BOND FUND
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period......................... $ 15.05 $ 17.19 $ 16.44 $ 15.71 $ 14.63
---------------------------------------------------
Income from investment operations:
Net investment income...................................... .94 .85 .93 1.03 1.10
Net realized and unrealized gain (loss) on investments..... .95 (1.76) .93 .73 1.08
---------------------------------------------------
Total from investment operations............................. 1.89 (.91) 1.86 1.76 2.18
---------------------------------------------------
Less distributions:
Net investment income...................................... (.93) (.85) (.93) (1.03) (1.10)
Net realized gains on investments.......................... -- -- (.18) -- --
In excess of net realized gains on investments............. -- (.38) -- -- --
---------------------------------------------------
Total distributions.......................................... (.93) (1.23) (1.11) (1.03) (1.10)
---------------------------------------------------
Net asset value, end of period............................... $ 16.01 $ 15.05 $ 17.19 $ 16.44 $ 15.71
---------------------------------------------------
Total Return (%)............................................. 12.98 (5.55) 11.88 11.56 15.44
Ratios and Supplemental Data
Net assets, end of period ($ millions)....................... 533 568 604 384 201
Ratio of operating expenses to average net assets (%)........ .95 .95 1.01 1.13 1.17
Ratio of net investment income to average net assets (%)..... 6.13 5.31 5.64 6.40 7.26
Portfolio turnover rate (%).................................. 201.07 63.75 100.98 63.00 90.43
</TABLE>

83
<PAGE>

FINANCIAL HIGHLIGHTS

AARP INSURED TAX FREE GENERAL BOND FUND

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

Net asset value, beginning of period ................... $16.93 $19.00 $17.88 $17.30 $16.12
---------------------------------------------------------------
Income from investment operations:
Net investment income .......................... .87 .86 .90 .93 1.00
Net realized and unrealized gain (loss) on
investments .................................... .81 (1.67) 1.55 .75 1.18
---------------------------------------------------------------
Total from investment operations ............... 1.68 (.81) 2.45 1.68 2.18
---------------------------------------------------------------
Less distributions:
Net investment income .......................... (.87) (.86) (.90) (.93) (1.00)
Net realized gains on investments .............. -- (.34) (.43) (.17) --
In excess of net realized gains on investments . -- (.06) -- -- --
---------------------------------------------------------------
Total distributions .................................... (.87) (1.26) (1.33) (1.10) (1.00)
---------------------------------------------------------------
Net asset value, end of period ......................... $17.74 $16.93 $19.00 $17.88 $17.30
---------------------------------------------------------------
Total Return (%) ....................................... 10.21 (4.48) 14.31 10.01 13.85
Ratios and Supplemental Data
Net assets, end of period ($ millions) ................. 1,807 1,914 2,087 1,487 1,068
Ratio of operating expenses to average net assets (%) .. .69 .68 .72 .74 .77
Ratio of net investment income to average net
assets (%) ........................................... 5.06 4.80 4.90 5.31 5.92
Portfolio turnover rate (%) ............................ 17.45 38.39 47.96 62.45 32.18
</TABLE>

AARP BALANCED STOCK AND BOND FUND

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
Year For the Period
Ended February 1, 1994 (a)
September 30, to September 30,
1995 1994
----------------------------------
<S> <C> <C>
Net asset value, beginning of period ........................... $14.64 $15.00
------------------------
Income from investment operations:
Net investment income .................................. .61 .25
Net realized and unrealized gain (loss) on investments.. 1.79 (.37)(b)
------------------------
Total from investment operations ............................... 2.40 (.12)
------------------------
Less distributions:
Net investment income .................................. (.60) (.24)
Net realized gains on investments ...................... (.04) --
------------------------
Total distributions ............................................ (.64) (.24)
------------------------
Net asset value, end of period ................................. $16.40 $14.64
------------------------
Total Return (%) ............................................... 16.80 (.78)(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ......................... 247 175
Ratio of operating expenses to average net assets (%) .......... 1.01 1.31(d)
Ratio of net investment income to average net assets (%) ....... 4.12 3.58(d)
Portfolio turnover rate (%) .................................... 63.77 49.32(d)
</TABLE>

(a) Commencement of operations

(b) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and repurchases
of Fund shares in relation to fluctuating market values during the period.

(d) Annualized

84
<PAGE>

AARP GROWTH AND INCOME FUND

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $34.13 $32.91 $28.67 $26.97 $22.30
----------------------------------------------------------------
Income from investment operations:
Net investment income .............................. 1.11 .94 .83 .97 1.11
Net realized and unrealized gain on investments .... 5.44 1.62 4.58 2.11 4.78
----------------------------------------------------------------
Total from investment operations ........................... 6.55 2.56 5.41 3.08 5.89
----------------------------------------------------------------
Less distributions from:
Net investment income .............................. (1.09) (1.13) (.87) (.90) (1.17)
Net realized gains on investments .................. (1.23) (.21) (.30) (.48) (.05)
----------------------------------------------------------------
Total distributions ........................................ (2.32) (1.34) (1.17) (1.38) (1.22)
----------------------------------------------------------------
Net asset value, end of period ............................. $38.36 $34.13 $32.91 $28.67 $26.97
----------------------------------------------------------------
Total Return (%) ........................................... 20.43 7.99 19.38 11.59 27.19
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 3,007 2,312 1,560 748 392
Ratio of operating expenses to average net assets (%) ...... .72 .76 .84 .91 .96
Ratio of net investment income to average net assets (%) ... 3.28 3.00 3.08 3.84 4.61
Portfolio turnover rate (%) ................................ 31.26 31.82 17.44 36.40 53.68
</TABLE>

AARP CAPITAL GROWTH FUND

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ......................... $ 31.74 $ 36.20 $ 30.30 $ 30.23 $ 23.32
---------------------------------------------------------------
Income from investment operations:
Net investment income ................................ .36 .00 .06 .15 .24
Net realized and unrealized gain (loss) on
investments ........................................ 6.91 (1.51) 7.19 1.09 9.05
---------------------------------------------------------------
Total from investment operations ............................. 7.27 (1.51) 7.25 1.24 9.29
---------------------------------------------------------------
Less distributions from:
Net investment income ................................ (.01) (.05) (.14) (.23) (.59)
Net realized gains on investments .................... (.64) (2.90) (1.21) (.94) (1.79)
---------------------------------------------------------------
Total distributions .......................................... (.65) (2.95) (1.35) (1.17) (2.38)
---------------------------------------------------------------
Net asset value, end of period ............................... $ 38.36 $ 31.74 $ 36.20 $ 30.30 $ 30.23
---------------------------------------------------------------
Total Return (%) ............................................. 23.47 (4.70) 24.53 3.94 42.81
Ratios and Supplemental Data
Net assets, end of period ($ millions) ....................... 692 683 607 424 242
Ratio of operating expenses to average net assets (%) ........ .95 .97 1.05 1.13 1.17
Ratio of net investment income to average net assets (%) ..... 1.00 .02 .22 .61 .90
Portfolio turnover rate (%) .................................. 98.44 79.65 100.63 89.20 99.62
</TABLE>

85
<PAGE>

NOTES TO FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES.

The AARP Cash Investment Funds, consisting of the AARP High Quality Money
Fund, the AARP Income Trust, consisting of the AARP GNMA and U.S. Treasury Fund
and the AARP High Quality Bond Fund, the AARP Tax Free Income Trust, consisting
of the AARP High Quality Tax Free Money Fund, (formerly AARP Insured Tax Free
Short Term Fund), and the AARP Insured Tax Free General Bond Fund, and the AARP
Growth Trust, consisting of the AARP Balanced Stock and Bond Fund, AARP Growth
and Income Fund, and the AARP Capital Growth Fund are each Massachusetts
business trusts and are registered under the Investment Company Act of 1940, as
amended, as open-end management investment companies. All funds are diversified.
The AARP Cash Investment Funds, has one series, the AARP Growth Trust has three
series and each of the other Trusts have two series. The Declaration of Trust of
each Trust permits its Trustees to create an unlimited number of series and to
issue an unlimited number of full and fractional shares of each separate series.

The policies described below are followed consistently by the funds in
preparation of their financial statements and are in conformity with generally
accepted accounting principles.

A. SECURITY VALUATION. The AARP High Quality Money Fund uses the penny
rounding method of security valuation as permitted under Rule 2a-7 of the
Investment Company Act of 1940. Under this method, securities for which market
quotations are readily available and which have remaining maturities of
sixty-one days or more from the date of valuation are valued at the mean between
the over-the-counter bid and asked prices by an independent registered
broker/dealer. On the sixtieth day prior to maturity and thereafter until
maturity, securities originally purchased with more than sixty days remaining to
maturity are valued at amortized cost calculated daily, based upon the market
valuation of the securities on the sixty-first day prior to maturity. The AARP
High Quality Tax Free Money Fund uses the amortized cost method of security
valuation as permitted under Rule 2a-7 of the Investment Company Act of 1940.
Under this method, the value of a security is determined by adjusting its
original cost to face value through the amortization of any acquisition discount
or premium at a constant rate until maturity, which approximates market.
Security valuation with respect to each of the remaining funds is performed in
the following manner:

Common and preferred stocks traded on national securities exchanges are
valued at the most recent sale price on such exchange where the security is
principally traded. If no sale occurred, the security is valued at the mean
between the most recent bid and asked quotations on such exchanges. If there is
no such bid and asked quotations the most recent bid quotation is used. Unlisted
securities quoted on the National Association of Securities Dealers Automatic
Quotation ("NASDAQ") System, for which there have been sales, are valued at the
most recent sale price reported on such system. If there are no such sales, the
value is the high or "inside" bid quotation. Unlisted securities which are not
quoted on the NASDAQ System but are traded in another over-the-counter market
are valued at the most recent sale price on such market. If no sale occurred,
the security is valued at the mean between the most recent bid and asked
quotations. If there are no such bid and asked quotations the most recent bid
quotation is used.

Portfolio debt securities with remaining maturities greater than sixty days
are valued by pricing agents approved by the Trustees, which prices reflect
broker/dealer-supplied valuations and electronic data processing techniques. If
the pricing agents are unable to provide such quotations, the most recent bid
quotation supplied by a bona fide market maker shall be used.

Short-term investments with remaining maturities of 60 days or less are
valued at amortized cost. Variable rate demand notes are carried at cost which
together with accrued interest approximates market.

The value of all other securities is determined in good faith under the
direction of the Trustees.

B. REPURCHASE AGREEMENTS. The AARP High Quality Money Fund, AARP Growth
Funds and AARP GNMA and U.S. Treasury Fund regularly invest in repurchase
agreements. Each of the AARP funds may enter into repurchase agreements with
selected banks and broker/dealers whereby each fund, through its custodian,
receives delivery of the securities collateralizing repurchase

86
<PAGE>

agreements, the amount of which at the time of purchase and each subsequent
business day is required to be maintained at such a level that the market value,
depending on the maturity of the underlying collateral, is equal to at least
101% of the resale price.

C. FUTURES CONTRACTS. Each of the funds in the AARP Income Trust, the AARP
Insured Tax Free General Bond Fund and the AARP Balanced Stock and Bond Fund may
enter into futures contracts. A futures contract is an agreement between a buyer
or seller and an established futures exchange or its clearinghouse in which the
buyer or seller agrees to take or make a delivery of a specific amount of an
item at a specified price on a specific date (settlement date). During the
period the AARP Balanced Stock and Bond Fund purchased interest rate futures as
a temporary substitute for purchasing selected investments. Also, during the
period the AARP Insured Tax Free General Bond Fund sold interest rate securities
futures to hedge against declines in the value of portfolio securities.

Upon entering into a futures contract, the Fund is required to deposit with
a financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.

Certain risks may arise upon entering into futures contracts including the
risk that an illiquid secondary market will limit the Fund's ability to close
out a futures contract prior to the settlement date and that a change in the
value of a futures contract may not correlate exactly with changes in the value
of the securities or currencies hedged. When utilizing futures contracts to
hedge, the Fund gives up the opportunity to profit from favorable price
movements in the hedged positions during the term of the contract.

D. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each of the funds in the
AARP Growth Trust, in connection with portfolio purchases and sales of
securities denominated in a foreign currency, may enter into forward foreign
currency exchange contracts ("forward contracts"). Additionally, from time to
time, each fund may enter into contracts to hedge certain foreign currency
denominated assets. A forward contract is a commitment to purchase or sell a
foreign currency at the settlement date at a negotiated rate. During the period,
the Fund utilized forward contracts as a hedge against changes in exchange rates
relating to foreign currency denominated assets.

Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.

Certain risks may arise upon entering into forward contracts from the
potential inability of counterparties to meet the terms of their contracts.
Additionally, when utilizing forward contracts to hedge, the Fund gives up the
opportunity to profit from favorable exchange rate movements during the term of
the contract.

E. FOREIGN CURRENCY TRANSLATIONS. Foreign currency transactions from
foreign investment activity are translated into U.S. dollars on the following
basis:

(i) market value of investment securities, other assets and
liabilities at the daily rates of exchange, and

(ii) purchases and sales of investment securities, dividend and
interest income and certain expenses at the rates of exchange
prevailing on the respective dates of such transactions.

The Funds do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.

87
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.

F. SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME. Securities
transactions are accounted for on the trade date basis and dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis. Original issue discount on securities purchased is accreted on an
effective yield basis over the life of the security. Acquisition discount is
accreted on taxable securities purchased with original maturity dates of one
year or less. Premium on securities purchased by the AARP Tax Free Income Trust
is amortized on an effective yield basis over the life of the security.

Each fund uses the specific identification method for determining the
realized gain or loss on investments sold for both financial and federal income
tax reporting purposes.

G. FEDERAL INCOME TAXES. Each of the funds is treated as a single entity
for federal income tax purposes. It is the policy of each fund to comply with
the requirements of the Internal Revenue Code as amended which are applicable to
regulated investment companies, and to distribute all of its taxable and tax
exempt income to its shareholders. Accordingly, the funds paid no U.S. federal
income taxes, and no provisions for federal income taxes were required.

H. DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of
each fund is declared as a dividend to shareholders. The dividends from AARP
High Quality Money Fund and each of the funds in the AARP Income Trust and the
AARP Tax Free Income Trust are declared daily and distributed monthly. The
dividends from AARP Balanced Stock and Bond Fund and AARP Growth and Income Fund
are declared and paid quarterly. The dividends from AARP Capital Growth Fund are
declared and paid annually. During any particular year, net realized gains from
securities transactions for each fund which are in excess of any available
capital loss carryforwards, would be taxable to the fund if not distributed and,
therefore, will be distributed to shareholders in the following fiscal year. The
AARP High Quality Money Fund takes into account realized gains and losses on the
sales of securities held less than one year in its daily distributions. An
additional distribution may be made by each fund to the extent necessary to
avoid the payment of a four percent federal excise tax.

The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal income tax
rules and regulations which may differ from generally accepted accounting
principles. These differences relate primarily to investments in options,
futures, forward contracts, foreign denominated investments, mortgage backed
securities, REITs and certain securities sold at a loss. As a result, net
investment income and net realized gain (loss) on investment transactions for a
reporting period may differ significantly from distributions during such period.
Accordingly, the Fund may periodically make reclassifications among certain of
its capital accounts without impacting the net asset value of the Fund.

I. EXPENSES. Each fund is charged for those expenses that are directly
attributable to it, such as management, custodian, audit, and certain
shareholder service fees. Expenses that are not directly attributable to a fund,
such as reports to shareholders, portions of Trustees' and legal fees, are
allocated among all the funds.

J. ORGANIZATION COST. Costs incurred by the AARP Balanced Stock and Bond
Fund in connection with its organization and initial registration of shares have
been deferred and are being amortized on a straight-line basis over a five-year
period.

K. PORTFOLIO INSURANCE. The cost of premiums paid by the AARP Insured Tax
Free General Bond Fund for insurance, which covers individual securities, is
non-cancellable and runs the life of such securities, is added to the cost basis
of such securities. This insurance provides for the timely payment of principal
and interest on these securities when due and protects the fund against loss
from default by the Municipal issuer. It does not protect the investor from
losses due to changes in market values.

88
<PAGE>

L. SECURITIES PURCHASED ON A FORWARD DELIVERY OR WHEN-ISSUED BASIS. The
AARP High Quality Money Fund, each of the funds in the AARP Income Trust and
AARP Tax Free Income Trust, and AARP Balanced Stock and Bond Fund may purchase
securities on a forward delivery or when-issued basis. Municipal, corporate and
government securities are frequently offered on a forward delivery or
when-issued basis. At the time the fund makes the commitment to purchase a
security on a forward delivery or when-issued basis, the price of the underlying
security is fixed. The fund will record the transaction at the time of the
commitment and reflect the value of the security in determining its net asset
value. The settlement date of the transaction can occur within one month or more
after the date the commitment was made. During the period between purchase and
settlement date, no payment is made on behalf of the fund and no interest
accrues to the fund.

NOTE 2. MANAGEMENT FEE AND OTHER RELATED TRANSACTIONS.

Under the investment management and advisory agreement (the "Management
Agreement") between each Trust and Scudder, Stevens & Clark, Inc. (the "Fund
Manager") the management fee consists of two elements: a Base Fee and an
Individual Fund Fee. The Base Fee is calculated as a percentage of the combined
net assets of all of the AARP Funds ("Program Assets"). Each AARP Fund pays, as
its portion of the Base Fee, an amount equal to the ratio of its daily net
assets to the daily net assets of all of the AARP Funds. The Annual Base Fee is
calculated as follows: .35%, of the first $2.0 billion of such assets, .33% of
the next $2.0 billion of such assets, .30% of the next $2.0 billion of such
assets, .28% of the next $2.0 billion of such assets, .26% of the next $3.0
billion of such assets, .25% of the next $3.0 billion of such assets, .24% of
such assets in excess of $14.0 billion.

In addition to the Base Fee Rate, each Fund agrees to pay the Fund Manager
a flat Individual Fund Fee based on the average daily net assets of that Fund.
The Individual Fund Fee Rate recognizes the different characteristics of each
Fund, the varying levels of complexity of investment research and securities
trading required to manage each Fund. The Individual Fund Fee Rate is calculated
at the following percentages of the average daily net assets of each fund: .10%
for AARP High Quality Money Fund and AARP High Quality Tax Free Money Fund; .12%
for AARP GNMA and U.S. Treasury Fund; .19% for AARP High Quality Bond Fund, AARP
Insured Tax Free General Bond Fund, AARP Balanced Stock and Bond Fund and AARP
Growth and Income Fund; .32% for AARP Capital Growth Fund. The amount for each
fund is shown in the Statement of Operations as Management Fee.

As manager of the assets of each Fund, the Fund Manager directs the
investments of each Fund in accordance with its investment objectives, policies
and restrictions. In addition to portfolio management services, the Fund Manager
under the Management Agreement will provide certain administrative services in
accordance with such Agreement. The Fund Manager has also entered into a Member
Services Agreement with AARP Financial Services Corp. ("AFSC"), a subsidiary of
AARP, and pays portions of its investment management and advisory fee to AFSC.

The Management Agreement also provides that the Fund Manager will reimburse
the funds for annual expenses in excess of the lowest state limitations imposed,
exclusive of taxes, brokerage commissions, interest and extraordinary expenses.
The Fund Manager agreed to maintain the annualized expenses of the AARP High
Quality Tax Free Money Fund at not more than 0.90% of average daily net assets
until February 1, 1996. The amount of expenses reimbursed by the Fund Manager,
if any, for each fund has been shown in the Statement of Operations as
Reimbursement of expenses from Fund Manager.

Each Trust has a shareholder servicing agreement with Scudder Service
Corporation ("SSC"), a wholly-owned subsidiary of Scudder. As shareholder
servicing agent, SSC provides various transfer agent, dividend disbursing, and
shareholder communication functions. The amount for each fund has been shown in
the Statement of Operations as Transfer and Dividend Disbursing Expense.

Effective September 5, 1995, Scudder Fund Accounting Corporation ("SFAC"),
a wholly-owned subsidiary of the Fund Manager, assumed responsibility for
determining the daily net asset value per share and maintaining the portfolio
and general accounting

89
<PAGE>

NOTES TO FINANCIAL STATEMENTS

records of AARP Growth and Income Fund and AARP Capital Growth Fund. For the
year ended September 30, 1995, the amount charged to the Funds by SFAC
aggregated $17,156 and $7,125, respectively, of which all was paid at September
30, 1995.

Each fund pays each Trustee not affiliated with Scudder or AARP $2,000
annually, $270 for each Trustees' meeting, $200 for each audit committee meeting
attended, and $100 for other committee meetings, plus expenses, subject to
certain maximums per Trustee for meetings held jointly with other funds. The
amount for each fund has been shown in the Statement of Operations as Trustees'
fees and expenses.

NOTE 3. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

As of September 30, 1995, the AARP Balanced Stock and Bond Fund had entered
into the following forward foreign currency exchange contracts resulting in
net unrealized appreciation of $159,340.

<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Contracts to Deliver In Exchange For Settlement Date (U.S.$)
- -------------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
FRF 9,466,230 USD 1,954,419 10/23/95 32,615
DEM 2,840,141 USD 2,116,728 10/23/95 126,725
-------
159,340
=======
</TABLE>

90
<PAGE>

REPORT OF INDEPENDENT
ACCOUNTANTS

November 7, 1995

To the Board of Trustees and Shareholders of
AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust and
AARP Growth Trust

In our opinion, the accompanying statements of assets and liabilities,
including the shares, principal amount, and value of the securities in the
lists of investments, and the related statements of operations and of changes
in net assets and the financial highlights present fairly, in all material
respects, the financial positions of AARP Cash Investment Funds, AARP Income
Trust, AARP Tax Free Income Trust, and AARP Growth Trust, which are comprised
of the eight AARP Funds listed in Note 1 to the financial statements, at
September 30, 1995 and the results of their operations, the changes in their net
assets, and their financial highlights for each of the periods indicated in
conformity with generally accepted accounting principles. These financial
statements and the financial highlights (thereafter referred to as "financial
statements") are the responsibility of the Trusts' management; our
responsibility is to express an opinion on these financials statements based on
our audits. We conducted our audits on these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audits to obtain a reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities owned at September 30, 1995 by correspondence with the custodian and
brokers and the application of alterative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis for the
opinion expressed above.

/s/Price Waterhouse LLP

<PAGE>

BLANK PAGE

<PAGE>
Officers and Trustees

Adelaide Attard

Trustee of AARP Cash Investment Funds, AARP Income Trust
and AARP Growth Trust; Member, New York City Department
of Aging Advisory Council--Appointed by Mayor (1995);
Consultant, Gerontology; Commissioner, County of Nassau,
NY, Department of Senior Citizen Affairs (1971-1991);
Board Member, American Association of International
Aging (1981 to present); Member, NYS Community Services
for the Elderly Advisory Council--Appointed by Governor
(1987-1991); Chairperson, Federal Council on Aging
(1981-1986); U.S. Delegate to 1982 United Nations World
Assembly on Aging.

Cyril F. Brickfield

Trustee of AARP Income Trust, AARP Tax Free Income
Trust, AARP Growth Trust; Honorary Trustee, AARP Cash
Investment Funds; Honorary President and Special
Counsel, American Association of Retired Persons; Board
Member: American Association of International Aging,
National Alzheimer's Association, and American
Federation of Aging Research (AFAR).

Robert N. Butler, M.D.

Trustee of AARP Income Trust and AARP Growth Trust;
Brookdale Professor of Geriatrics and Adult Development;
Chairman, Henry L. Schwartz Department of Geriatrics and
Adult Development, Mount Sinai Medical Center; Formerly
Director, National Institute on Aging, National
Institute of Health (1976-1982).

Linda C. Coughlin

President and Trustee of AARP Cash Investment Funds,
AARP Income Trust, AARP Tax Free Income Trust and AARP
Growth Trust; Managing Director and Member, Board of
Directors of Scudder, Stevens & Clark, Inc.; Director of
Scudder Investor Services, Inc.

Horace B. Deets

Vice Chairman and Trustee of AARP Cash Investment Funds,
AARP Income Trust, AARP Tax Free Income Trust and AARP
Growth Trust; Executive Director, American Association
of Retired Persons; Member, Board of Councilors, Andrus
Gerontology Center; Member of the Board, HelpAge
International.

Mary Johnston Evans

Trustee of AARP Cash Investment Funds, AARP Tax Free
Income Trust and AARP Growth Trust; Director: Baxter
International, Inc., Delta Air Lines, Inc., Household
International, Inc., The Sun Company, Dun & Bradstreet
Corporation and Saint-Gobain Corporation.

93
<PAGE>

Edgar R. Fiedler

Trustee of AARP Cash Investment Funds, AARP Income Trust
and AARP Tax Free Income Trust; Vice President and
Economic Counsellor, The Conference Board, Inc.;
Director of The Stanley Works, Zurich-American Insurance
Company, HT Insight Funds, and Emerging Mexico Fund.

Cuyler W. Findlay

Chairman and Trustee of AARP Cash Investment Funds, AARP
Income Trust, AARP Tax Free Income Trust, and AARP
Growth Trust; Managing Director of Scudder, Stevens &
Clark, Inc., Senior Vice President and Director, Scudder
Investor Services, Inc.

Eugene P. Forrester

Trustee of AARP Income Trust and AARP Tax Free Income
Trust; Consultant, International Trade; Lt. General
(Retired), U.S. Army; Command General, U.S. Army Western
Command, Honolulu; Consultant: Digital Equipment Corp.,
DHI, Philip Morris, PICS Previews, and Whittle
Communications.

Wayne F. Haefer

Trustee of AARP Income Trust, AARP Tax Free Income
Trust, and AARP Growth Trust; Director, Membership
Division of AARP; Secretary, Employee's Pension and
Welfare Trusts of AARP and Retired Persons Services,
Inc.; Formerly Director, Administration and Data
Management Division of AARP.

William B. Macomber

Trustee of AARP Tax Free Income Trust and AARP Growth
Trust; Formerly Teacher, History and Government,
Nantucket High School, Nantucket, MA; Director, Becton,
Dickinson & Co. (until 1994); Trustee Emeritus, Carnegie
Endowment for International Peace; Formerly President,
The Metropolitan Museum of Art and U.S.
Ambassador to Turkey and to Jordan.

George I. Maddox, Jr.

Trustee of AARP Income Trust and AARP Tax Free Income
Trust; Director and Professor, Long Term Care Resources
Program, Duke University Medical Center; Senior Fellow,
Center for the Study of Aging and Human Development,
Duke University; Professor of Sociology, Departments of
Sociology and Psychiatry, Duke University.

94
<PAGE>

Robert J. Myers

Trustee of AARP Cash Investment Funds, AARP Income Trust
and AARP Growth Trust; Actuarial Consultant; Formerly
Executive Director, National Commission on Social
Security Reform; Director: NASL Series Trust, Inc. and
North American Funds, Inc.; Formerly Director, Board of
Pensions, Evangelical Lutheran Church in America;
Formerly Chairman, Commission on Railroad Retirement
Reform; Member, U.S. Office of Technology Assessment,
Prospective Payment Assessment Commission.

Joseph S. Perkins

Trustee of AARP Cash Investment Funds, AARP Income
Trust, AARP Tax Free Income Trust, and AARP Growth
Trust; Director, American Association of Retired
Persons; Corporate Retirement Manager, Polaroid
Corporation.

James H. Schulz

Trustee of AARP Income Trust, AARP Tax Free Income Trust
and AARP Growth Trust; Professor of Economics and
Kirstein Professor of Aging Policy, Policy Center of
Aging, Florence Heller School, Brandeis University.

Gordon Shillinglaw

Trustee of AARP Cash Investment Funds, AARP Tax Free
Income Trust, AARP Growth Trust; Professor Emeritus of
Accounting, Columbia University Graduate School of
Business; Director and Treasurer, FERIS Foundation of
America (until 1994).

Edward V. Creed* Pamela A. McGrath*
Vice President Vice President and Treasurer

Thomas W. Joseph* Edward J. O'Connell*
Vice President Vice President and Assistant Treasurer

David S. Lee* Kathryn L. Quirk*
Vice President and Assistant Treasurer Vice President and Secretary

Douglas M. Loudon* Howard Schneider*
Vice President Vice President

Thomas F. McDonough* Cornelia M. Small*
Vice President and Assistant Secretary Vice President

*Scudder, Stevens & Clark, Inc.

Effective January 1, 1995, each member of and nominee for the Board of Trustees
must own shares of one or more of the Funds within the AARP Investment Program
of which he/she serves as Trustee.

95
<PAGE>

Service and Tax Information

Shareholder Our knowledgeable AARP Mutual Fund
Service Line Representatives are available to answer
1-800-253-2277 questions about the Program or your account
Monday through Friday, between 8:00 a.m. and
8:00 p.m., eastern time. Transactions can be
made Monday through Friday between 8:00 a.m. and
4:00 p.m., eastern time.

Write: AARP Investment Program
from Scudder
P.O. Box 2540
Boston, MA 02208-2540
For overnight AARP Investment Program
and certified mail: from Scudder
42 Longwater Drive
Norwell, MA 02061-1612

Easy-Access Line Shareholders with a touch-tone telephone may
1-800-631-4636 call this automated line to obtain AARP Fund
performance and account information or to
exchange or sell (redeem) AARP Mutual Fund
shares. This service is available 24 hours a
day, 7 days a week.

Transactions by Fax If you have access to a fax machine, you can fax
1-800-821-6234 transaction requests. Any exchange or redemption
request received after 4:00 p.m. business days
or on weekends, will be processed the next
business day. All faxes are kept confidential.

TDD (Telecommunications AARP members with hearing or speech impairments
Device for the Deaf and and access to TDD equipment can communicate with
Speech Impaired) the AARP Investment Program Monday through
1-800-634-9454 Friday between 8:00 a.m. and 6:00 p.m., eastern
time. Transactions can be made between 8:00 a.m.
and 4:00 p.m., eastern time.

Tax Information Of the dividends paid from net investment income
by the AARP High Quality Tax Free Money Fund and
the AARP Insured Tax Free General Bond Fund for
the Funds' fiscal years ending September 30,
1995, 100% constituted exempt-interest dividends
for regular federal income tax purposes.

Pursuant to Section 852 of the Internal Revenue
Code, the AARP Balanced Stock and Bond Fund, the
AARP Growth and Income Fund and the AARP Capital
Growth Fund designate $1,788,162, $58,824,089,
and $3,898,191, respectively, as capital gain
dividends for their fiscal years ended September
30, 1995.

In January 1996 you will receive federal tax
information on all distributions paid to your
account in calendar year 1995.